20 November 2020 | 5:46PM GMT

GOAL: Global Opportunity Asset Locator Outlook for 2021: Rotation inoculation — remain pro-risk

Christian Mueller-Glissmann, CFA +44(20)7774-1714 | christian.mueller- [email protected]

Goldman Sachs International

Alessio Rizzi n We are pro-risk for 2021 and expect the pro-cyclical rotation across and within +44(20)7552-3976 | [email protected] assets to continue, supported by a strong economic recovery from the COVID-19 Goldman Sachs International Cecilia Mariotti shock. With a favourable growth/inflation mix and still elevated equity risk premia +44(20)7552-0450 | [email protected] we are OW equities and UW bonds. With tighter credit spreads we are N credit Goldman Sachs International but still see opportunities to move down in quality. Over a 12m horizon we are Andrea Ferrario +44(20)7552-4353 | OW commodities (N for 3m), supported in particular by a bullish oil view. [email protected] Goldman Sachs International n While absolute equity valuations are high after the sharp recovery, they remain Peter Oppenheimer +44(20)7552-5782 | attractive vs. bonds. And equities should be able to digest a gradual increase in [email protected] bond yields better than fixed income as long as they come alongside better Goldman Sachs International David J. Kostin growth. We expect more rotation within equities – the leadership in regions, +1(212)902-6781 | [email protected] sectors and styles has been unusually defensive in the recovery. Goldman Sachs & Co. LLC Kathy Matsui n Our Risk Appetite Indicator (RAI) has turned positive, which alone is not a +81(3)6437-9950 | [email protected] Goldman Sachs Japan Co., Ltd. bearish signal. In the past when the RAI shifted positive the macro backdrop was Timothy Moe, CFA similarly strong. We expect growth to take over from the search for yield as the +852-2978-1328 | [email protected] Goldman Sachs (Asia) L.L.C. main driver. Renewed COVID-19 concerns might weigh on sentiment in the near Jeffrey Currie term but we think growth pricing across assets remains relatively conservative. +44(20)7552-7410 | [email protected] Goldman Sachs International

For the exclusive use of [email protected] n Four multi-asset themes for 2020: (1) Managing duration frustration – higher Lotfi Karoui equity duration risk, (2) Time to give credit to equity, (3) Commodity commotion +1(917)343-1548 | lotfi[email protected] Goldman Sachs & Co. LLC and oil price recovery and (4) Diversification desperation continues. Zach Pandl +1(212)902-5699 | [email protected] n We highlight four risks for 2020: (1) Second-wave risks and inoculation Goldman Sachs & Co. LLC disappointments, (2) Concentration, regulation, taxation, (3) Inflation and rates Kamakshya Trivedi +44(20)7051-4005 | volatility and (4) Policy uncertainty. [email protected] Goldman Sachs International n Positioning was at bearish or neutral levels for most of 2020, but recently there Praveen Korapaty has a been a bullish shift in investor sentiment. Still, we think positioning can +1(212)357-0413 | [email protected] Goldman Sachs & Co. LLC

pick up further in 2021 given our constructive view on next year. 7f100ca895df11e0bb4300215ace2648 Caesar Maasry n Volatility across assets reset sharply lower last month, with implied levels for a +1(212)902-8763 | [email protected] lot of markets nearing or at all-time lows – we look at selective hedges. Goldman Sachs & Co. LLC

This report is intended for distribution to GS institutional clients only

Investors should consider this report as only a single factor in making their investment decision. For Reg AC certification and other important disclosures, see the Disclosure Appendix, or go to www.gs.com/research/hedge.html. Goldman Sachs GOAL: Global Opportunity Asset Locator Table of Contents

Asset allocation: Remain pro-risk — focus on cyclical exposure 3

Multi-asset: Rotation inoculation 6

Risks: Inoculation, Concentration, Inflation, Politics 16

Multi-asset positioning: More bullish sentiment but little rotation so far 19

Multi-asset volatility: Lower but no low-vol regime — hedge opportunities 21

Equities (3m & 12m Overweight): The bull run in 2021 25

Government Bonds (3m & 12m UW): Robust recovery, shallow selloff 31

Credit (3m &12m Neutral): Same direction, different magnitude 36

Commodities (3m N and 12m OW): REVing up a structural bull market 40

FX: Dollar downtrend 45

Calendar: Key events in 2021 51

Asset class forecast returns and performance 52

Key macro forecasts 53

Disclosure Appendix 54 For the exclusive use of [email protected] 7f100ca895df11e0bb4300215ace2648

20 November 2020 2 Goldman Sachs GOAL: Global Opportunity Asset Locator Asset allocation: Remain pro-risk — focus on cyclical exposure

We are pro-risk for 2021 and expect the pro-cyclical rotation across and within assets to continue, supported by a strong economic recovery from the COVID-19 shock. With a favourable growth/inflation mix and still elevated equity risk premia we are OW equities and UW bonds. With tighter credit spreads we are N credit but still see opportunities to move down in quality. Over a 12m horizon we are OW commodities (N for 3m), supported in particular by a bullish oil view.

Our tactical trade ideas across assets have a pro-cyclical flavour, supported by our strong, above-consensus global growth outlook and expectations for easy monetary policy. The rotation might be bumpy with renewed COVID-19 waves and as US fiscal stimulus is likely pushed to next year. We would use any volatility to re-risk as markets are likely to focus increasingly on the recovery next year – we also look for overlay hedges post the reset in cross-asset volatility.

Exhibit 1: We are pro-risk in our asset allocation for 2021

3-Month Horizon 12-Month Horizon Asset Class Weight** Asset Class Weight** Equities OW Equities OW MSCI Asia Pac ex Japan ↑ 1 S&P 500 → STOXX Europe 600 ↑ 2 MSCI Asia Pac ex Japan → TOPIX ↑ 4 TOPIX → S&P 500 → 3 STOXX Europe 600 → Cash N Commodities OW Credit N Credit N EMBI ↑ 1 EMBI ↑ USD HY ↑ 2 EUR HY → EUR HY ↑ 3 USD HY → EUR IG → 4 EUR IG → USD IG ↓ 5 USD IG → Commodities N 6 Cash N 10 yr. Gov. Bonds UW 10 yr. Gov. Bonds UW US ↑ 2 Germany → Japan → 1 Japan → Germany → 3 US ↓

For the exclusive use of [email protected] ** Arrows denote preferences within asset classes.

Source: Goldman Sachs Global Investment Research

We are OW equities (3m and 12m) and expect strong returns across regions. Valuation expansion drove the equity recovery from the COVID-19 shock, consistent with the ‘Hope’ phase – in 2021 earnings should take over as the main driver as markets transition to the ‘growth’ phase. We forecast strong earnings growth across regions, mostly above consensus. With elevated equity risk premia and a gradual increase in rates we see absolute valuations, while high, as well-supported. We do not have strong

regional preferences for 12m – forecast returns in Dollar are similar. For 3m we are OW 7f100ca895df11e0bb4300215ace2648 non-US markets as they should benefit more from a cyclical recovery. We generally prefer cyclical and value and have reduced defensive/growth exposures.

Marquee is a product of Key Ideas: US: High growth investment (GSTHHGIR); Europe: Fiscal Infrastructure the Goldman Sachs Global (GSSTFISC), Recovery (GSSTRCOV), Renewables (GSSBRNEW); Asia ex Japan: Digital Markets Division Dozen (GSSZDG12), Global cyclicals vs. defensives (GSSZMSGC vs. GSSZMSDF), Japan: Capex (GSJPCPEX), Cyclicals (GSJPCYCL), Womenomics (GSJPWJDL); EM: LatAm, long banks vs. consumer staples, Long Korea vs. Taiwan.

20 November 2020 3 Goldman Sachs GOAL: Global Opportunity Asset Locator

We are UW bonds (3m and 12m) but see modest downside due to muted inflation pressures and central banks on hold. We forecast modestly higher yields across most of the G10 – YE2021 10yr forecasts: US 1.3%, Germany -0.4%, Japan 0.10% and UK 0.5%. Bond risk premia should drive much of the repricing – we expect yield curves to steepen. The US real yield curve could steepen significantly with large declines in front-end real yields, especially if our bullish oil view materialises. With low global bond yields we think bonds are unlikely to be good hedges for equities; however, pronounced sell-offs could present tactical opportunities to add duration as a hedge as we think yields will remain range-bound until there is a sustainable pick-up in realised inflation.

Key Ideas: Long 3y1y forward US real yields, Long (1.65:1) 1y forward 5s30s steepeners, Long 2s30s Gilt curve steepeners, Long 10y10y-2y2y HICP curve flatteners.

We are N credit (3m and 12m) due to limited total return potential. Credit spreads should continue to inch to their pre-COVID-19 levels. While near-term growth may prove bumpy, a better outlook for next year following recent positive vaccine developments, the accommodative stance of monetary policy, direct central bank interventions and a supportive supply/demand technical backdrop should support credit risk appetite. Valuations limit long-term upside relative to the stellar performance since late March, but credit will likely deliver decent excess returns and solid Sharpe ratios. We generally favour a down-in-quality stance and pro-cyclical and “disrupted” sectors.

Key Ideas: Long High Yield vs. Investment Grade in the USD cash market (1 to 1.15 notional), Long USD Investment Grade bonds vs. agency MBS, Long EUR AT1 vs. High Yield bonds, Long US AAA CLOs vs. AAA CMBX index, Long EM HY credit.

We are N commodities for 3m and shift OW for 12m as we see a new structural bull market emerging in 2021. As demand recoveries meet restrained supply due structural under-investment, we see upside in most commodities. Non-energy commodities face immediate upside supported by Chinese demand and adverse weather shocks. We expect copper prices to end 2021 at $7500/mt. Because of high

For the exclusive use of [email protected] inventories, upside in oil will likely come after the winter – we forecast Brent at $65/bbl from the fall of 2021 to early 2022. This should support the oil-heavy S&P GSCI Enhanced index. Near term gold may be range-bound, but we maintain our $2,300/toz target, supported by declines in 5-year US real rates and a weaker Dollar.

Key Trade Ideas: Long carbon-neutral S&P GSCI, Long “Back to the USSR” basket.

We remain bearish the Dollar and forecast a 6% decline in the trade-weighted Dollar over the next 12m. The Dollar appears meaningfully overvalued and investors are overweight US assets. High valuations, negative real rates and a recovery of global 7f100ca895df11e0bb4300215ace2648 growth should weigh on the Dollar. We are cautious EUR and satellite currencies near-term and prefer CAD and AUD to position for better growth. JPY can appreciate despite higher bond yields on more favourable net portfolio flows. We forecast further Yuan gains, with USD/CNY falling to 6.30. We like MXN, ZAR and INR for a combination of value, real carry and current account dynamics that provide better risk/reward.

Key Ideas: Long CAD and AUD vs. USD with equal weights, Long vol-weighted basket of MXN, ZAR and INR, Long CNY and Long 3Y CGBs combined, Long SGD vs. TWD.

20 November 2020 4 Goldman Sachs GOAL: Global Opportunity Asset Locator

Review of 2020: Average global equity returns with high volatility and concentrated leadership The MSCI World has posted an 8% annualised return for 2020 so far, roughly in-line with the long-run average. But this masks the extreme volatility of 2020, where the MSCI World was at some point down 35% and recovered 59% from the trough. Even more remarkable, a standard US 60/40 portfolio returned 11%, well above long-run averages, and following a very strong 2019. The main winners of 2020 were long-duration, safe and stable growth assets such as Nasdaq, S&P 500, Gold, global growth stocks and US 30yr bonds. On the flip side more cyclical assets, especially energy commodities, financials, value, EM FX and European equities have been material laggards.

Exhibit 2: Strong year for some assets, especially Nasdaq, growth stocks and Gold but energy and cyclical assets have lagged

50% +79% YTD performance 2019 (Full year perfomance) 40% 30% 20% 10% 0% -10% -20% -30% -40% -53% DXY EMBI Topix US IG EM FX EM US HY US 30y US 10y Copper MXAPJ FANG+ EUR IG Nasdaq EUR HY S&P 500 US 60/40 MSCI EM Cyc v. Def Cyc v. Japan 30y Japan 10y USD Cash S&P GSCI S&P Momentum S&P low vol STOXX 600 MSCI World World Value JPY vs USD vs JPY Japan 60/40 CHF vs EUR EUR vs USD Russell 2000 CNH USD vs Germany 10y Europe 60/40 WorldGrowth US Risk Parity US Risk Fin. vs. staples S&PGSCI Gold S&P GSCI Energy GSCI S&P TIPS vs UST (10y) S&P GSCI Ind. Mat.

Source: Datastream, iBoxx, Goldman Sachs Global Investment Research

Credit had one of the most violent sell-offs but also recovered sharply, supported by aggressive monetary and fiscal policy. However, adjusting for beta, equities have generally outperformed credit since the summer, at least outside Europe. USD credit has also struggled to keep up with the S&P 500 during the strong summer rally due to less exposure to US Tech – EMBI has also lagged MSCI EM for similar reasons. Early in the recovery CDX IG managed to keep pace with the S&P 500, supported by the Fed, but it also underperformed in August due to the increasingly narrow leadership in equities. In Europe in contrast, credit has generally outperformed equities. This has been due to less of a boost from the Tech sector for For the exclusive use of [email protected] equities as well as European credit fundamentals being better compared with the US.

Exhibit 3: While in the US and EM equity outperformed credit in the recovery, in Europe it lagged

15% 5% 10%

5% 5%

-5% 0% -5% -5% -15% -15% -10%

-25% -15%

-25% -20% -35%

S&P 500 MSCI Europe -25% 7f100ca895df11e0bb4300215ace2648 -45% CDX IG (beta-adj.) Itraxx Europe (beta-adj.) -35% -30% MSCI EM CDX HY (beta-adj.) Itraxx Europe Xover (beta-adj.) -55% CDX EM (beta-adj.) USD IG ER (beta-adj.) EUR IG ER (beta-adj.) -35% EMBI ER (beta-adj.) USD HY ER (beta-adj.) EUR HY ER (beta-adj.) -65% -45% -40% Jan-20 Mar-20 May-20 Jul-20 Sep-20 Nov-20 Jan-20 Mar-20 May-20 Jul-20 Sep-20 Nov-20 Jan-20 Mar-20 May-20 Jul-20 Sep-20 Nov-20

Adjustment based on 1-year beta of monthly returns as of 2019YE

Source: Datastream, Bloomberg, Haver Analytics, Goldman Sachs Global Investment Research

20 November 2020 5 Goldman Sachs GOAL: Global Opportunity Asset Locator Multi-asset: Rotation inoculation

Vaccine supports continued recovery with little inflation pressure We expect a strong recovery in 2021 and forecast global growth of 6.0% (vs. consensus of 5.2%). In the near term risks to growth are skewed to the downside due to renewed COVID-19 waves. We think the global economy will return to the GDP levels from end-2019 by around mid-2021 (China is already back to its pre-Covid peak, while Europe is not likely to get there until the end of 2021). At the same time we expect inflation to remain low as it will likely take several years before output and employment are back to their potential levels.

We expect DM central banks to steer a dovish path for the next several years. The Fed, the ECB and the Bank of England are likely to wait until early 2025 before hiking rates. As a result, with a continued recovery in risky assets, financial conditions are likely to remain very easy (Exhibit 4). And while the US elections have not resulted in a ‘blue wave’ outcome, limiting potential for aggressive US fiscal stimulus, we expect governments in the hardest-hit countries to continue supporting their economies and limit scarring from the COVID-19 crisis.

A successful and broadly available vaccine is critical for our bullish growth outlook and likely to remain key for markets. It should boost economic activity in depressed sectors such as travel, accommodation and food services from Q1. Among the G3, our economists estimate that the US and Europe will enjoy a GDP boost of about 2%, with most emerging economies on a more delayed timeline and China benefiting much less because it has already largely recovered from the virus (Exhibit 5).

Exhibit 4: US Financial Conditions are very easy, close to the Exhibit 5: A larger vaccine GDP boost to the US and Europe vs. all-time lows from the Tech Bubble China US Financial conditions index (FCI) Estimated Impact of Vaccine on Real GDP Level

For the exclusive use of [email protected] 104 3.0% US Euro Area* China

103 2.5%

102 Easier financial 2.0% 101 conditions

100 1.5%

99 1.0% 98 * Euro Area: 0.5% Germany, 97 France, Spain and Italy. 96 0.0% 95 97 99 01 03 05 07 09 11 13 15 17 19 21 Oct-20 Jan-21 Apr-21 Jul-21 Oct-21 Jan-22 Apr-22 Jul-22 Oct-22 7f100ca895df11e0bb4300215ace2648

Source: Goldman Sachs Global Investment Research Source: Goldman Sachs Global Investment Research

Strong equity recovery driven by valuations but unusually defensive After one of the sharpest bear markets on record, global equities recovered similarly quickly and the MSCI World is up 10% for the year. From the trough, the recovery has been as strong as post the GFC (which followed a much longer and deeper

20 November 2020 6 Goldman Sachs GOAL: Global Opportunity Asset Locator

bear market). In fact, the recovery of the S&P 500 has been the strongest since the Great Depression in the mid-1930s, making it the shortest bear market on record: the S&P 500 is now up 13% and the Nasdaq up 34% for the year.

However, non-US markets have only just recovered their losses, with the recent rally post the positive vaccine newsflow. Valuations have been the main driver of the equity recovery, as is common in early recoveries from bear markets. However, even on 2021/FY2 earnings which include some recovery, valuations are higher than before the bear market and expanded more than during the GFC recovery. S&P 500 absolute valuations are now particularly high and nearing Tech Bubble levels.

Exhibit 6: A sharp recovery, comparable to post-GFC Exhibit 7: Valuations have been the key driver of the recovery MSCI World around bear markets (data since 1973) FY2 P/E ratio

200 10th/90th Percentile 30 S&P 500 Average Coronacrisis MSCI Europe Global Financial Crisis 180 Topix 25 MSCI EM

160 20

140

15 120

10 100

-9m -6m -3m +3m +6m +9m 80 5 1 year before Drawdown End 1 year after 90 92 94 96 98 00 02 04 06 08 10 12 14 16 18 20

Source: Datastream, Goldman Sachs Global Investment Research Source: Datastream, IBES, Goldman Sachs Global Investment Research

Another unusual feature of the recovery has been the defensive leadership within equities (and across assets): while cyclicals have recovered vs. defensives roughly in line with a normal recovery, they have lagged the post-GFC recovery despite a similarly large underperformance in the previous 6 months. Even more remarkable has been the underperformance of value vs. growth, both during the bear market and the recovery. While value stocks have not always led during recoveries, the magnitude of For the exclusive use of [email protected] underperformance this time is unprecedented.

Exhibit 8: Cyclicals have outperformed defensives, in line with the Exhibit 9: The underperformance of value stocks has been very average recovery but less than the GFC different to the GFC recovery World Cyclicals vs Defensives around bear markets (data since 1997) MSCI World Value vs. Growth around bear markets (data since 1970)

160 10th/90th Percentile 125 10th/90th Percentile Average Average Coronacrisis 120 Coronacrisis 150 Global Financial Crisis Global Financial Crisis 115 140 110

130 105 7f100ca895df11e0bb4300215ace2648

120 100

95 110 90 100 85 -9m -6m -3m +3m +6m +9m -9m -6m -3m +3m +6m +9m 90 80 1 year before Drawdown End 1 year after 1 year before Drawdown end 1 year after

Source: Datastream, Goldman Sachs Global Investment Research Source: Datastream, Goldman Sachs Global Investment Research

20 November 2020 7 Goldman Sachs GOAL: Global Opportunity Asset Locator

Bonds are still yielding to equities — equity risk premia appear high A key reason for the strong rise in equity valuations and the leadership in equities has been low and anchored bond yields during the recovery; in contrast to a normal recovery since the late 1990s, they remain close to all-time lows (Exhibit 10). With more than a quarter of global bonds (or US$16.5trn) having negative yields again, the search for yield has pushed investors to equities. And after 4 decades of de-rating vs. bonds, LT growth expectations implied by equities are conservative.

An equity risk premium (ERP) estimate based on a single-stage DDM (ERP = Dividend yield + LT growth - 10-year bond yield) using consensus trend GDP growth suggests the ERP remains close to GFC highs (Exhibit 11). The US ERP has increased most during the COVID-19 crisis due to US 10-year yields catching up with the G4: it is still roughly 100bp above pre-crisis levels. As long as growth recovers, we expect further ERP declines, which should outweigh increases in bond yields.

Exhibit 10: Bond yields have been more anchored compared with a Exhibit 11: Equity risk premia have trended up since the late 1990s normal bear market recovery Single stage DDM ERP = DY + LT growth - 10-year bond yield with LT US 10-year yields around bear markets (bp, data since 1998) growth = 6-10y GDP growth based on consensus economics

200 10th/90th Percentile 8 US Average Europe Current 7 Japan 150 Global Financial Crisis 6

100 5

4 50 3

0 2

1 -50 0 -9m -6m -3m +3m +6m +9m -100 -1 1 year before Drawdown End 1 year after 90 92 94 96 98 00 02 04 06 08 10 12 14 16 18 20

Source: Datastream, Goldman Sachs Global Investment Research Source: Haver Analytics, Consensus Economics, Goldman Sachs Global Investment Research

For the exclusive use of [email protected] The real regime — boost from falling real yields during the recovery But the drivers of higher bond yields will matter: while nominal yields have been anchored, breakeven inflation has recovered as markets faded deflation risks, pushing down real yields into negative territory (Exhibit 12). As a result, the S&P 500 has become very negatively correlated with US 10-year TIPS yields (Exhibit 13) – continued declines in real yields with rising inflation expectations can boost equity valuations as long as real growth expectations are stable or pick up.

We expect real yield curves to steepen in 2021 but only modest increases in

long-dated real yields: equities should also be able to digest those, especially if they 7f100ca895df11e0bb4300215ace2648 are gradual and come alongside better growth. Rising longer-dated real yields might also drive some valuation de-rating of growth vs. value, as LT growth expectations for secular growth stocks were stable or picked up during the COVID-19 crisis, e.g., for ‘stay at home’ beneficiaries, they benefitted most from lower real yields.

20 November 2020 8 Goldman Sachs GOAL: Global Opportunity Asset Locator

Exhibit 12: US real yields declined more than normal during the Exhibit 13: Equities have become very negatively correlated with recovery from the bear market US 10yr real yields in 2020 US 10-year real yields (bp, data since 1998) 12-month correlation of weekly changes with S&P 500

120 10th/90th Percentile 0.8 Average Current 0.7 Global Financial Crisis 80 0.6 0.5

40 0.4 0.3 0.2 0 0.1 0.0 -40 -0.1 -0.2 -80 -0.3 US 10-year yield -0.4 US 10-year breakeven inflation -9m -6m -3m +3m +6m +9m US 10-year TIPS yield -120 -0.5 1 year before Drawdown End 1 year after 98 00 02 04 06 08 10 12 14 16 18 20

Source: Bloomberg, Goldman Sachs Global Investment Research Source: Bloomberg, Goldman Sachs Global Investment Research

Rotation continuation — risk appetite indicator in positive territory After the largest decline on record in March (to -4.1), our Risk Appetite Indicator (RAI) has shifted into positive territory again (Exhibit 14). Risk appetite picked up due to the search for yield and more positive macro momentum. While a lot of our positioning and sentiment indicators have been range-bound since Q2, there are signs of a broader pick-up in risk appetite this month (see Cross-asset positioning section).

With global PMIs above 50 and rising, our RAI has been mostly positive. With growth slowing in Q4 due to lockdowns, there is a risk that PMIs will double-dip, which could weigh on risk appetite temporarily. Increased risk appetite also increases vulnerability to other growth shocks, e.g., disappointments on US fiscal stimulus. However, with growing confidence in next year’s recovery, supported by effective vaccines, our RAI should spend more time in positive territory in 2021.

For the exclusive use of [email protected] Exhibit 14: Risk appetite tends to increase during periods of rising PMIs when they are above 50 GS Risk Appetite Indicator (RAI)

2.0

1.5

1.0

0.5

0.0

-0.5

-1.0 7f100ca895df11e0bb4300215ace2648 -1.5

-2.0 Low at -4.1 -2.5

-3.0 91 93 95 97 99 01 03 05 07 09 11 13 15 17 19 Global PMI below 50 and rising Global PMI above 50 and rising GS Risk Appetite Indicator (Bloomberg ticker: GSRAII)

Source: Datastream, Haver Analytics, Goldman Sachs Global Investment Research

20 November 2020 9 Goldman Sachs GOAL: Global Opportunity Asset Locator

Periods when the RAI was positive usually had a reflationary backdrop, supported by positive growth momentum (Exhibit 15): US 10-year yields generally increased, USD HY credit spreads tightened further and commodities rallied in most cases. Equity valuations generally expanded less, with earnings growth taking over as a driver.

Cyclicals and value outperformed defensives and growth stocks, although the hit ratios were less good and the average outperformance of value vs. growth has been small, likely due to structural headwinds in recent years. Finally, EM outperform DM – the main exception was the recovery post the Euro area crisis. Performance across and within assets since October is consistent with such a shift and with our outlook for 2021.

Exhibit 15: Historical periods when the RAI was rising from positive levels had a reflationary backdrop

Periods with positive RAI S&P 500 S&P 500 12m forw. P/E US 10-year yield USD HY credit spreads Equity styles (MSCI World) S&P GSCI Zero Peak Months Change Return At zero At peak Change At zero At peak Change At zero At peak Change Cyc vs Def Val vs Gro EM vs. DM Global Mar-91 Aug-91 5 0.4 5% 13.7 14.0 2% 8.0 8.2 0.1 848 607 -241 -3% -1% 17% 4% Feb-92 Apr-92 2 0.5 0% 15.3 14.7 -4% 7.4 7.6 0.2 576 489 -87 -4% 1% 15% -1% Jun-93 May-94 11 0.4 4% 14.6 13.4 -9% 5.9 7.2 1.3 488 359 -129 7% 8% 28% -1% Mar-96 Jul-96 4 0.7 3% 14.7 14.9 1% 6.5 7.0 0.6 388 345 -43 -1% 0% 0% 15% Feb-99 Dec-99 10 1.2 19% 22.9 23.9 4% 5.3 6.4 1.1 515 476 -39 6% -9% 38% 44% Dec-01 Mar-02 3 0.6 0% 21.6 20.5 -5% 5.0 5.3 0.3 812 734 -78 7% 0% 10% 11% Nov-02 Jul-03 8 1.2 7% 16.0 17.2 7% 4.2 4.5 0.3 901 567 -334 5% 3% 11% 19% May-09 Sep-09 4 1.0 19% 14.0 14.6 4% 3.2 3.5 0.3 1323 809 -514 6% 3% 6% 15% Nov-10 Feb-11 3 0.8 9% 12.7 13.2 4% 2.5 3.7 1.2 579 453 -126 5% 2% -9% 7% Aug-12 Sep-13 13 1.0 23% 12.4 13.9 12% 1.6 3.0 1.3 591 460 -131 3% 3% -14% -1% Aug-16 Jan-18 18 1.4 34% 17.0 18.5 9% 1.6 2.7 1.1 546 332 -214 25% -1% 8% 21% Oct-19 Jan-20 3 0.5 9% 17.2 18.4 7% 1.8 1.8 0.0 389 348 -41 -2% -4% 3% 2% Oct-20 Nov-20 1 0.4 5% 21.3 21.9 3% 0.8 0.8 0.1 518 448 -70 6% 4% 4% 5% Average: 7 0.8 11% 16.0 16.4 3% 4.4 5.1 0.7 663 498 -165 4% 0% 9% 11% Median: 4 0.7 8% 15.0 14.8 4% 4.6 4.9 0.4 577 468 -127 5% 1% 9% 9% Hit ratio: 11/12 9/12 12/12 12/12 8/12 7/12 10/12 9/12

Source: Datastream, Haver Analytics, Goldman Sachs Global Investment Research

From policy to growth — changing drivers of risk appetite in 2021 There should also be a change in the drivers of risk appetite. After a sharp pick-up in the early part of the recovery in May, growth optimism (PC1) has struggled to turn positive up until recently – monetary policy (PC2) and a weaker Dollar (PC3) were the key drivers. But with the positive vaccine newsflow this month, growth optimism (PC1) has broken out and has risen sharply into positive territory.

For the exclusive use of [email protected] Exhibit 16: Growth should taker over as a driver of risk appetite from policy in 2021 RAI principal components

12 TINA Reflation Goldilocks Growth slowdown TINA 2.0 Policy ? Trump growth US fiscal Fed 2nd dovish put 8 wave shock growth shock US/ China dovish trade pivot 4 tensions part1 0

-4

-8 Brexit 7f100ca895df11e0bb4300215ace2648 growth US rate shock shock -12 Italy US/ China political China trade shock -16 growth tensions part shocks 2 -20 COVID-19 growth -24 shock 15 16 17 18 19 20 PC1: Global growth PC2: Monetary policy PC3: Dollar PC4: Euro area risk

Source: Datastream, Goldman Sachs Global Investment Research

20 November 2020 10 Goldman Sachs GOAL: Global Opportunity Asset Locator

The interaction of the drivers will matter for cross-asset performance from here; combined changes result in four different regimes: (1) Central bank put: easier monetary policy expectations in response to weaker growth, (2) Goldilocks: easier monetary policy despite better growth, (3) Reflation: tighter monetary policy with better growth, and (4) Balanced Bear: tighter monetary policy despite weaker growth.

Cross-asset performance varies in those different regimes (Exhibit 17). While in ‘Goldilocks’ most assets tend to post positive returns (similar to 1H 2019), during a ‘Balanced Bear’ the majority of assets tend to have negative returns. The latter can result in diversification desperation with few places to hide. During 2020 the dominant regimes have been ‘Central bank put’ and ‘Balanced Bear’ – in 2021 it is likely markets will spend more time between ‘Reflation’ and ‘Goldilocks’, in our view.

Exhibit 17: More time spent between Goldilocks and Reflation in 2021 Average monthly returns for different RAI PC1 and PC2 mixes since 2000

Central bank put (PC1 ↓, PC2 ↑) Goldilocks (PC1 ↑, PC2 ↑) Reflation (PC1 ↑, PC2 ↓) Balanced bear (PC1 ↓, PC2 ↓) -3% -2% -1% 0% 1% 2% 3% 4% -1%0%1%2%3%4%5%6% -4% -3% -2% -1% 0% 1% 2% 3% 4% -5% -4% -3% -2% -1% 0% 1% 2% US 30yr MSCI EM WTI oil Low vol v. S&P US 10y MSCI APJ TOPIX US 30yr Low vol v. S&P Russell Russell DXY German 10y MSCI World Copper German 10y Gold S&P 500 MSCI EM US 10y EM Credit STOXX 600 MSCI APJ Japan 10y USD IG EM Credit STOXX 600 JPY JPY Copper MSCI World FANG+ v. S&P EUR IG WTI oil S&P 500 Gold CHF EUR HY Fin. v. Stpl EUR IG Japan 10y USD HY FANG+ v. S&P Grwth v. Val EUR FANG+ v. S&P EUR HY CHF USD HY TOPIX Cyc v. Def NDX v. S&P FANG+ v. S&P AUD USD HY USD IG Grwth v. Val Gold Small vs. Large TIPS v. UST AUD USD IG NDX v. S&P Small vs. Large DXY Fin. v. Stpl TIPS v. UST EUR EUR HY Cyc v. Def AUD EM FX EM FX US 30yr DXY USD HY NDX v. S&P Small vs. Large EM Credit EM Credit TIPS v. UST EUR IG EM FX Copper Small vs. Large EUR Grwth v. Val WTI oil MSCI APJ EM FX Gold Cyc v. Def MSCI EM CHF EUR IG EUR HY S&P 500 US 10y EUR AUD Copper German 10y CHF Fin. v. Stpl MSCI World NDX v. S&P Japan 10y TOPIX STOXX 600 Japan 10y USD IG S&P 500 WTI oil TIPS v. UST Low vol v. S&P MSCI World For the exclusive use of [email protected] Cyc v. Def JPY German 10y STOXX 600 Russell Grwth v. Val JPY Russell TOPIX DXY US 10y MSCI APJ Fin. v. Stpl Low vol v. S&P US 30yr MSCI EM

Source: Datastream, Goldman Sachs Global Investment Research

Growth pricing remains conservative, in particular in Europe Growth pricing remains conservative in several places across assets and regions. Exhibit 18 shows cyclical assets have not fully retraced in the recovery so far. DM assets initially discounted a better recovery than EM, but more recently EM growth pricing has picked up more and been more resilient, with renewed lockdowns in Europe 7f100ca895df11e0bb4300215ace2648 but also strong growth momentum in China.

In Europe/EM the largest retracements were in credit, and in the US in US breakeven inflation and equity vs. bond performance (Exhibit 19). Across markets cyclicals vs. defensives have recovered only half of the earlier declines. And since Q4 there has been a tug of war for cyclical assets between a better growth outlook for 2021, supported by vaccines, and potential for more challenging growth data into year-end.

20 November 2020 11 Goldman Sachs GOAL: Global Opportunity Asset Locator

Exhibit 18: Cyclical assets have recovered but are still below Exhibit 19: Credit has led in non-US markets with cyclicals vs. levels from the start of the year defensives broadly lagging Retracement of cyclical assets post COVID-19 bear market. Based on Retracement of cyclical assets post COVID-19 bear market assets in Exhibit 19

100% Europe US EM 100% Europe US EM 90% 80% 80% 60% 70%

60% 40%

50% 20% 40% 0% 30%

20% FX EM Average Average Average CDX EM 10% Cycl. vs Defs. vs Cycl. Cycl. vs. Defs. vs. Cycl. IG CDX HY vs Cycl. Vs. Defs. Cycl. 0% IG HY vs iTraxx MXEF vs. US 10y vs. MXEF US 10y break. infl. break. US 10y EU 10y break. infl. break. EU 10y STOXX vs Ger 10yr STOXX vs

Jan-20 Mar-20 May-20 Jul-20 Sep-20 Nov-20 US 10Y vs S&P 500

Source: Datastream, Goldman Sachs Global Investment Research Source: Datastream, Goldman Sachs Global Investment Research

This has been particularly the case for Europe: in the first COVID-19 wave, European cyclical assets were closely correlated with lockdown indicators, and they suffered again in October (Exhibit 20). But European growth pricing has started to decouple due to the vaccine and prospects for a decline in infection rates. This suggests positive asymmetry with conservative growth pricing – European growth expectations have become very bearish relative to the US (Exhibit 21).

Exhibit 20: European growth pricing has managed to decouple from Exhibit 21: European growth pricing across assets has been recent lockdown news particulary bearish vs. US before the positive vaccine newsflow Europe vs. US growth pricing vs. manufacturing PMIs

2.5 10 100% Retracement of European growth pricing across assets 0 2.0 8 90% Europe Containment Stringency Index 10 (U. of Oxford) (RHS, Inverse) 80% 20 1.5 6 1.0 4 70% GS 30 estimate 0.5 2 60% 40 0.0 0

For the exclusive use of [email protected] 50% 50 -0.5 -2 40% 60 -1.0 -4 30% 70 -1.5 -6 20% 80 -2.0 -8 10% 90 -2.5 -10 0% 100 99 01 03 05 07 09 11 13 15 17 19 Jan-20 Mar-20 May-20 Jul-20 Sep-20 Nov-20 Jan-21 Mar-21 Relative cyclical pricing (5y z-score of yoy changes) PMI differential (RHS)

Source: Datastream, University of Oxford, Goldman Sachs Global Investment Research Source: Haver Analytics, Goldman Sachs Global Investment Research

Several related cross-currents are likely to matter for multi-asset investors in 2021: 7f100ca895df11e0bb4300215ace2648 (1) Managing duration frustration — higher equity duration risk Duration of a 60/40 portfolio has increased close to all-time highs with yields moving closer to the zero lower bound (Exhibit 22). The role of bonds in portfolios is more questionable. But higher valuations and concentration in growth stocks has also lengthened equity duration, which increases sensitivity to growth and rate shocks. Balanced portfolios are more risky either way – higher equity duration increases deflation tails, higher bond duration increases inflation risk (and weighs on returns).

20 November 2020 12 Goldman Sachs GOAL: Global Opportunity Asset Locator

The increase in equity duration has been most pronounced in the US, driven by a record market concentration and a larger weight in low-yielding growth stocks (Exhibit 23). In Europe equity duration has also increased but remains lower and in Japan it has actually declined in recent years. Also, duration in USD IG credit markets has also increased in recent years and YTD. The same has been true for EM USD credit (EMBI). More international diversification within equities and bonds, to non-US markets, might help lower multi-asset portfolio risk going forward.

Exhibit 22: Duration risk for a standard US 60/40 portfolio has Exhibit 23: US equity duration is the highest across markets while increased materially in Japan it has declined since the late 1990s Data for US (60% S&P 500, 40% US 10-year bonds) Equity duration estimate for +100 bps in discount rate

10 35 -50% US -70% 9 Europe 30 -45% Japan (RHS) 8 -60% -40% 7 25 -50% 6 -35%

5 20 -30% -40%

4 -25% 15 -30% 3 -20% 2 10 -20% -15% 1 60/40 yield 60/40 duration estimate (RHS) 0 5 -10% -10% 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010 2020 90 92 94 96 98 00 02 04 06 08 10 12 14 16 18 20

Source: Robert Shiller, Goldman Sachs Global Investment Research Source: Datastream, Goldman Sachs Global Investment Research

(2) Time to give credit to equity The total return potential for fixed income investors looks increasingly limited: the proportion of negative-yielding corporate bonds (mostly IG) is close to 10% (Exhibit 24). Credit yields are close to all-time lows across markets, leaving little buffer for even gradual increases in bond yields (Exhibit 25). Investors will likely have to give more credit to equity in 2021 – the search for yield is likely to remain intense but for most equity markets we see more upside than in credit, even adjusted for risk. For the exclusive use of [email protected]

Exhibit 24: Return-free risk - proportion of negative-yielding Exhibit 25: While credit yields are close to all-time lows, credit corporate bonds has increased again spreads and the gap to dividend yields are well above those Percentiles since 1998

Credit DY - credit 12% 1.4 Market value (RHS, trillions) Yield spread spread Proportion of global corporate debt outstanding Asset (%) %ile (bps) %ile (bps) %ile 1.2 10% S&P 500 1.5 14% USD IG 1.9 0% 109 28% 38 41% 1.0 USD HY 5.4 0% 448 38% -301 52% 8% US USD IG BBB 2.3 0% 148 26% -1 46% 0.8 USD HY BB 4.1 0% 317 47% -170 43% 6% USD HY CCC 10.7 21% 971 48% -824 47% 0.6 MSCI Europe 2.4 15% 7f100ca895df11e0bb4300215ace2648 4% EUR IG 0.4 0% 105 30% 134 15% 0.4 Europe EUR HY 3.5 6% 391 34% -152 52% MSCI EM 2.2 24% 2% 0.2 EM EMBI 4.7 3% 382 55% -160 35%

0% 0.0 15 16 17 18 19 20

Source: Bloomberg, Goldman Sachs Global Investment Research Source: Datastream, Haver Analytics, Goldman Sachs Global Investment Research

20 November 2020 13 Goldman Sachs GOAL: Global Opportunity Asset Locator

But how to give credit to equity will matter. Credit spreads on an absolute basis and relative to dividend yields still point to some value: USD HY credit spreads lagged materially the decline in S&P 500 dividends yields in the recovery. While equity valuations appear elevated vs. credit, a strong recovery in earnings next year should still support relative returns. But equity vs. credit performance will also heavily depend on relative sector skews – in the US and EM equities are overweight Tech vs. credit and cyclical/value parts of the market might have the best chance of outperforming credit.

(3) Commodities commotion — oil price recovery Commodities, and in particular oil, are likely to become a more important cross-asset driver in 2021: we forecast Brent oil prices at US$65/bbl in 2H 2021. Higher oil prices tend to boost cyclical assets: EM assets, USD HY credit, non-US equities, cyclicals vs. defensives and value vs. growth have been positively correlated with oil prices (Exhibit 26). In the last 12 months US 10-year breakeven inflation has been less correlated to oil – on the flip side, equity markets with a larger weight in long-duration growth stocks, such as the US and Asia, might benefit less.

Direct investment in commodities may be the most efficient expressions of our bullish forecasts; we are OW for 12m. Energy-related assets, such as oil equity, HY USD energy credit and oily FX might not provide the same exposure to an oil rally as in the past. This is due to ESG headwinds for equities, cash flow concerns for credit and across EMs and DMs, the beta of currencies to oil prices has fallen due to governments’ FX interventions to lower oil-related volatility. Still, CLP, RUB and NOK have lagged commodity prices materially and could be an attractive laggard trade.

Exhibit 26: EM assets and USD HY credit tend to benefit most from higher oil prices - US 10y breakeven inflation less correlated recently 12m correlation of weekly returns versus WTI

0.5 25th/75th Percentile 0.4 Correlation since 1990 0.3 Current

For the exclusive use of [email protected] 0.2

0.1

0.0

-0.1

-0.2

-0.3

-0.4 DXY Gold SXXP Bond TOPIX EM FX EM Copper US 10y MXAPJ USD IG EUR IG S&P US 30yr Bond EUR HY USD HY US TIPS S&P 500 JPY/US$ Bond MSCIEM CHF/US$ EUR/US$ EM Credit EM S&P 500 Small vs. Small Japan 10y Japan US BE Infl Cyc vs Def vs Cyc Large (US) Large Val vs. Gth Val Japan 20yr Japan Low vol vs.vol Low Nasdaqvs. Fin vs. Stap vs. Fin MSCIWorld German 10y German 30yr

7f100ca895df11e0bb4300215ace2648 Source: Datastream, Haver Analytics, Goldman Sachs Global Investment Research

(4) Diversification desperation continues Lack of safe assets is likely to remain a key theme in 2021 – benefits from cross-asset diversification were much lower in 2020 (Exhibit 27). As we wrote in Global Strategy Paper: Balanced Bear Repair, after 3 decades of tailwinds from disinflation and monetary policy easing, with bond yields close to the zero lower bound there is less of a buffer for equity drawdowns. Balanced portfolios, such as 60/40 and

20 November 2020 14 Goldman Sachs GOAL: Global Opportunity Asset Locator

risk parity strategies, might offer lower returns with higher risk and face more deleveraging pressure in ‘risk off’.

Due to the negative correlations of longer-dated real yields with risky assets at the zero lower bound, a lot of traditional safe havens have become less reliable as well: for example, Gold and Yen have been more positively correlated with the S&P 500 in 2020 (Exhibit 28). The Dollar is the only asset that has been more negatively correlated with equities, and we think at the zero lower bound FX can offer more attractive ‘risk off’ hedges. The Yen looks cheap and should perform better in ‘risk off’ in 2021 – also, buying downside optionality on pro-cyclical FX after vol resets appears attractive.

Generally we see a stronger case for international diversification within both equities and bonds in 2021 – we think low-yielding EM local currency bonds (‘DMs of EM’) can be a good alternative to DM bonds, and we see benefits from mixing US with non-US equity. Another option is to replace equity risk itself: after the vol reset, longer-dated calls or short-dated put hedges can help limit downside exposure, while substituting dividend swaps may help to lower the duration of equity portfolios (see Cross-asset volatility section). Finally, as uncertainty during the recovery is likely to remain high, large increases in bond yields might offer opportunities to add duration again.

Exhibit 27: In 2020 multi-asset portfolios were more risky due to Exhibit 28: Dollar has been more negatively correlated with S&P lack of diversification across assets 500 while most assets are more correlated Ratio of equal-weighted portfolio volatility and average of each asset’s Correlation with S&P 500 (weekly changes) volatility (daily returns)

90% 1.0 2020 0.8 Since 2010 80% 0.6 0.4 70% 0.2 0.0 60% -0.2 -0.4

50% -0.6 For the exclusive use of [email protected] WTI JPY DXY CNY Gold

Less EMBI US IG EU IG 40% diversification EU HY US HY US 30 US 30 yr US 10 yr MSCI EM

3-month window Nikkei 225 EM LY IRS EM Cycl vs Def vs Cycl EM HY IRS HY EM Japan 10 yr 10 Japan STOXX 600 China 5y IRS 5y China 1-year window yr 10 German

30% Growth vs Value

98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 yr breakeven US 10

Note: assets included are S&P 500, US 10yr bond, Gold, S&P GSCI Commodities, USD HY credit. Source: Datastream, Goldman Sachs Global Investment Research

Source: Datastream, Goldman Sachs Global Investment Research 7f100ca895df11e0bb4300215ace2648

20 November 2020 15 Goldman Sachs GOAL: Global Opportunity Asset Locator Risks: Inoculation, Concentration, Inflation, Politics

As always there are plenty of risks to worry about, e.g., COVID-19 developments, Brexit, EM vulnerabilities, US/China trade tensions. Below, we highlight four risks in particular:

(1) Second-wave risks and inoculation disappointments Risks related to COVID-19 are likely to remain front and centre into 2021. Near-term for markets there is a tug of war of rising COVID-19 cases weighing on growth due to lockdowns and newsflow on vaccines/ second-derivative improvements on infections. The recovery has been closely linked to the probability of the availability of a vaccine by Q1 2021, which rose with positive Phase 3 data from Pfizer/BioNT and Moderna (Exhibit 29). Unsurprisingly, cyclical assets, e.g., value and ‘going out’ stocks such as Airlines, have been particularly correlated with vaccine newsflow (Exhibit 30).

Focus will likely shift to regulatory approvals, manufacturing capacity/supply dynamics and distribution, together with signs of successful inoculation. The FDA still looks likely to approve at least one safe and effective vaccine by January, which would be followed by rapid immunisations of high-risk groups and –within a few months – the broader population. Given the likely global demand (and current supply dynamics) for a COVID-19 vaccine, there might be the need for multiple companies to succeed; our Healthcare equity analysts expect Phase 3 data from AstraZeneca before the end of the year and from Johnson & Johnson shortly after, although efficacy might be lower.

Exhibit 29: The recovery of global equities has been somewhat Exhibit 30: Value, EM, Europe and ‘going out’ cyclicals have correlated with the probability of a vaccine benefited the most from a higher probability of a vaccine Global equities vs. probability of a vaccine Correlation with probability of 25mn vaccine doses available 2021 Q1-end in the US (weekly changes)

107 100 0.4 Since May 2020

104 90 0.3 For the exclusive use of [email protected] 80 0.2 101 70 0.1 98 60 0.0 95 50 -0.1 92 40 -0.2 89

30 DXY EMBI Topix EM FX EM US HY US 10y MXAPJ Nasdaq EUR HY

86 S&P 500 20 MSCIEM

Global equities S&P GSCI GS Airlines STOXX 600 MSCIWorld JPY vs USD vs JPY EUR vs USD 83 Vaccine by Q1 2021 (RHS) 2000 Russell 10 vs. staples Fin. S&P GSCI Gold S&P GSCI MSCI World Def. World MSCI

Vaccine by end Q3 2021 (RHS) Cyc. World MSCI S&P GSCI Energy S&P GSCI 80 0 Value World MSCI May-20 Jun-20 Jul-20 Aug-20 Sep-20 Oct-20 Nov-20 GS Goods vs. Services vs. GS Goods

Source: Good Judgment Project, Goldman Sachs Global Investment Research Source: Datastream, Bloomberg, Good Judgement Project, Goldman Sachs Global Investment 7f100ca895df11e0bb4300215ace2648 Research

(2) Concentration, regulation, taxation The strong performance of global growth stocks, especially during the COVID-19 crisis, has increased market concentration, with a few low-yielding, growth stocks having a larger weight in indices (in some cases due to index rebalancing). The effective N, which is the number of stocks in an equal-weighted portfolio with a similar level of

20 November 2020 16 Goldman Sachs GOAL: Global Opportunity Asset Locator

diversification, has dropped across indices since 2018 but in particular for the S&P 500 (Exhibit 31).

Having a less well-diversified, concentrated portfolio of long-duration stocks might also justify a higher ERP. The volatility contribution of the top 20 S&P 500 stocks was more than 50% during the summer (Exhibit 32). With rising market concentration, there is more potential for idiosyncratic growth shocks, such as taxation and regulation, to affect performance. Our US equity strategy team has highlighted the negative LT growth impact from historical regulatory scrutiny in the case of IBM in 1969, AT&T in 1974 and Microsoft in 1998.

Exhibit 31: In particular, the S&P 500 has become increasingly Exhibit 32: In August nearly half of all S&P 500 risk was driven by concentrated in just a few stocks the top 20 stocks Effective N (1/ Herfindahl index) Volatility contribution of the top 20 stocks to the S&P 500

200 S&P 500 STOXX Europe 600 Topix 70% Volatility contribution Weight in index

180 60% 160

50% 140

120 40%

100 30% 80

20% 60

40 10% 90 92 94 96 98 00 02 04 06 08 10 12 14 16 18 20 90 92 94 96 98 00 02 04 06 08 10 12 14 16 18 20

Source: Datastream, Goldman Sachs Global Investment Research Source: Datastream, Goldman Sachs Global Investment Research

(3) Inflation and rates volatility Markets are pricing little risk of high inflation in the next 5 years (Exhibit 33). While our economists also expect anchored inflation and policy rates globally, they forecast US core inflation to rise temporarily above 2% in the second quarter of 2021 (PCE peaking

For the exclusive use of [email protected] at around 2¼%), reflecting a rebound in virus-sensitive categories and base effects. With our bullish oil forecasts, headline inflation could temporarily bounce to 3% before weakening into year-end. This might fuel investor concerns on an earlier-than-expected exit from the current expansionary policy stance.

Historically, equity/bond return correlations have turned more positive when rates have risen too much too quickly: if US 10-year yields increased by more than 2 standard deviations over 3 months, bond sell-offs weighed on the S&P 500 and 3-month rolling equity/bond correlations turned positive (Exhibit 34). Such sharp increases in

yields happened during the May 2013 ‘taper tantrum’, the ‘Bund tantrum’ in April 2015 7f100ca895df11e0bb4300215ace2648 and twice during the Fed tightening in 2018. Those were usually due to hawkish monetary policy pivots and to concerns about rising inflation.

20 November 2020 17 Goldman Sachs GOAL: Global Opportunity Asset Locator

Exhibit 33: Markets have repriced deflation risk lower but little Exhibit 34: Fast increases in bond yields tend to weigh on equities upside risk to inflation S&P 500 vs. US 10-year bond correlation Option-implied distribution of 5-year US CPI inflation

100% 1.0 Equity/Bond correlation (3-month rolling) 5x

0.8 3-month change in US 10y yield in standard deviations (RHS) 4x

80% 0.6 3x

0.4 2x

60% 0.2 1x

0.0 0x 40% -0.2 -1x

-0.4 -2x 20% -0.6 -3x

-0.8 -4x 0% 10 11 12 13 14 15 16 17 18 19 20 -1.0 -5x High Inflation (>2.75) Medium Inflation (1.25-2.75) Low Inflation (<1.25) 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20

Source: Bloomberg, Goldman Sachs Global Investment Research Source: Bloomberg, Goldman Sachs Global Investment Research

(4) Policy uncertainty The COVID-19 crisis has triggered a material policy response, which is leaving most governments with more stretched fiscal and monetary positions, and less of a buffer for fresh shocks – debt/GDP ratios have risen sharply to Great Depression levels (Exhibit 35). While with both ECB support and the Recovery Plan the bar for Euro area sovereign stress to return in 2021 is high, Germany and Netherlands will hold national elections next year. Also, several EMs have used both fiscal and monetary policy aggressively, and some (such as Brazil) have maxed out on both dimensions.

And US policy uncertainty remains high even after the elections and has likely kept equity risk premia elevated through 2020 (Exhibit 36). US fiscal stimulus is likely to be pushed to next year and there remain larger uncertainties on size as well. While a ‘blue wave’ outcome did not materialise, there will likely be a Georgia Senate runoff election on January 5, 2021. Our economists would expect both an earlier Fed liftoff and

For the exclusive use of [email protected] a slightly faster pace of tightening if Democrats win both Georgia races and pass a larger stimulus package that substantially accelerates the recovery.

Exhibit 35: Global debt/GDP ratios have increased sharply during Exhibit 36: Rising policy uncertainty has likely continued to weigh the COVID-19 crisis on equity vs. bond valuations

18 Shiller earnings yield minus US 10-year yield 300 250 US Germany Japan Italy US economic policy uncertainty (1-year rolling average, RHS) 16 14 250 200 12 10 200 150 8

6 150 7f100ca895df11e0bb4300215ace2648

100 4 2 100 0 50 -2 50 -4 0 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010 2020 -6 0 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010 2020

Note: Germany and Japan defaulted on their debt in WW2. Source: Datastream, Haver Analytics, Goldman Sachs Global Investment Research

Source: GFD, Goldman Sachs Global Investment Research

20 November 2020 18 Goldman Sachs GOAL: Global Opportunity Asset Locator Multi-asset positioning: More bullish sentiment but little rotation so far

Positioning was at bearish or neutral levels for most of 2020, but recently there has a been a bullish shift in investor sentiment. Based on the 13 indicators we track, overall risky asset positioning moved from the 40th percentile prior to the US election to the 60th percentile (Exhibit 37). While positioning indicators are far from the extremes, they are no longer signalling positive or negative asymmetry for risky assets. In November there has been a sharp increase in sentiment surveys (AAII) and one of the largest weekly inflows into equity funds since the Tech Bubble (Exhibit 38).

That said, even after the recent pick-up, we think positioning can pick up further in 2021 given our constructive view on next year. During the COVID-19 bear market investors materially reduced risk. Government bond and money market funds showed the largest inflows, while equity fund flows were very negative. Adjusting for assets under management, US IG fund flows showed the largest inflows as investors re-risked mostly via high-quality fixed income (Exhibit 39). Our estimate of cash allocations is still high (Exhibit 40). We found that, historically, a steepening of the yield curve combined with a pick-up in activity indicators should result in money markets outflows.

The elevated uncertainty around both the US elections and the trajectory of the recovery has weighed on investor sentiment. Historically, positioning indicators tend to weaken ahead of US elections and improve afterwards, and there was a similar pattern of relief this year, helped by the vaccine newsflow (Exhibit 41). Global equity fund flows have materially lagged the improvement in activity indicators (Exhibit 42): a continued recovery should support a catch-up of equity fund flows.

While sentiment has improved, institutional investor positioning is not uniformly bullish. US equity future positions declined over the last 2 months and are well below YTD highs (Exhibit 43). Options positioning indicators also declined from the bullish levels at after the summer. And still elevated volatility has likely prevented a re-risking of

For the exclusive use of [email protected] systematic investors. Lower volatility next year might support an increase in risky asset allocation from pro-cyclical investors, such as CTAs, vol target and risk parity funds.

Exhibit 37: Positioning indicators back above average levels Exhibit 38: Sharp increase in sentiment and fund flows Average percentile of sentiment indicators in Exhibit 38 Percentile of sentiment indicators since 2007

100% RISK-OFF RISK-ON 90% Mar-20 Ahead of US Election Current Average 80% Global Equity Flow (3m) 13 70% Risky vs Safe Asset Flows (4w) US Call/Put Volume Ratio 11 60% Inv. Intelligence Bull v. Bear (US) AAII Bull v. Bear (US) 9 7f100ca895df11e0bb4300215ace2648 50% GS RAI Momentum (GSRAIM) 40% Global Equity Flow (12m) 7 GS RAI (GSRAII) 30% US Equity CFTC future pos. 5 20% CTA Beta to Equity (1m) VIX 3 10% JPY & Gold CFTC future pos. 0% Equity Risk Parity Allocation 1 07 08 09 10 11 12 13 14 15 16 17 18 19 20 0% 20% 40% 60% 80% 100%

Source: Haver, EPFR, Datastream, Goldman Sachs Global Investment Research Source: Haver, EPFR, Datastream, Goldman Sachs Global Investment Research

20 November 2020 19 Goldman Sachs GOAL: Global Opportunity Asset Locator

Exhibit 39: Money market and high-quality risky fixed income Exhibit 40: Cash allocation remains at cycle highs but is declining showed the largest increase in positioning in 2020 US asset class size. Bond size based on Bloomberg Barclays bonds Global YTD fund flows as a percentage of AuM indices market cap. Cash size based on zero maturity money (MZM: M2 + Money Market AuM)

25% 35% Cash holdings as a % of total US asset size 20% YTD flows as % AUM

15% 30% 10%

5% 25% 0%

-5%

20% -10% US IG Equity US HY US Eq. EM Eq. EM DMEq. IG & HY IG US Govt IG Bonds Mortgage HY Bonds Europe IG Europe Europe HY Europe Europe Eq. Europe 15% Agg. Bonds Agg. Govt Bonds Govt DM Fix. Inc. Fix. DM EM Fix. Inc. Fix. EM Inflation Prot. Inflation Fixed Income Fixed Dev. Asia Eq. Asia Dev. Money Market Money 90 92 94 96 98 00 02 04 06 08 10 12 14 16 18 20

Source: EPFR, Haver, Goldman Sachs Global Investment Research Source: Haver, Goldman Sachs Global Investment Research

Exhibit 41: Global equity fund flows picked up post election, Exhibit 42: Global equity fund flows have materially diverged from similarly to previous episodes activity indicators in 2020 Global equity fund flows as a percentage of AuM around US elections

6% 2004 500 Global Equities 12m rolling flows ISM (RHS) 65 2016 5% 400 63 2008 61 4% 2012 300 59 3% 2020 200 57 2% 100 55 1% 0 53 0% -100 51 -1% -200 49

-2% -300 47 -9m -6m -3m +3m +6m +9m -3% -400 45 1 year before US Election date 1 year after 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20

Source: EPFR, Haver, Goldman Sachs Global Investment Research Source: EPFR, Haver, Goldman Sachs Global Investment Research For the exclusive use of [email protected]

Exhibit 43: US Equity future positions is not extreme Exhibit 44: Systematic investors have room for re-risking into equity

250 Drawdown > 10% 55% Equity Allocation of a US Risk parity strategy 1.2 US Net Equity Future Positions of Asset Managers ($ bn) Beta of CTA funds performance to Equity (RHS) 50% 1.0 200 45% 0.8

40% 150 0.6 35% 0.4 100 30% 7f100ca895df11e0bb4300215ace2648 0.2 25% 50 20% 0.0

0 15% -0.2 07 08 09 10 11 12 13 14 15 16 17 18 19 20 07 08 09 10 11 12 13 14 15 16 17 18 19 20

Source: Haver, CFTC, Goldman Sachs Global Investment Research Source: Datastream, Bloomberg, Goldman Sachs Global Investment Research

20 November 2020 20 Goldman Sachs GOAL: Global Opportunity Asset Locator Multi-asset volatility: Lower but no low-vol regime — hedge opportunities

Large vol reset but still elevated for risky assets Volatility for risky assets has remained elevated in the recovery. Global equity volatility has normalised at a slower pace than in previous recoveries from bear markets (Exhibit 45). The sharp but uncertain recovery coupled with US election and vaccine newsflow kept realised (and implied) volatility elevated. Ahead of the US elections, there was still a large volatility premium priced. But since then 3m implied vol has reset sharply and trades below 1m realised for many assets (Exhibit 46).

Equity vol was pricing the largest tail moves and saw the largest reset – VIX term structure has shown a remarkable decline, in particular in the front end. Since the US election, VIX has halved, from 40 to 20 (Exhibit 47). That said, even after the reset, volatility for risky assets remains elevated (roughly 70th percentile) and vol curves are generally flat, which suggests not all risks have been priced out (Exhibit 48). Across assets, US equity volatility is still the most expensive, gold vol is also elevated while rates and FX vol are relatively low (Exhibit 49).

Exhibit 45: Realised vol has been high for a recovery Exhibit 46: Implied vol below realised for many assets MSCI World 1m realised volatility around bear markets (data since 1970) 3m implied vs 1m realised volatility

90 10th/90th Percentile 1.8x 100% Average 1.6x Current Percentile (RHS) 90% 80 Coronacrisis 1.4x 80% 70% 70 Global Financial Crisis 1.2x 60% 1.0x 60 50% 0.8x 50 40% 0.6x 30% 40 0.4x 20% 0.2x 10% 30 0.0x 0% 20 WTI Gold Copper CDX IG CDX HY 10 S&P 500 MSCIEM FTSE 100 USD JPY/ Nikkei 225 Nikkei GBP/ USD EUR/ USD USD 2-year EUR 2-year MSCIEAFE USD 10-year -9m -6m -3m +3m +6m +9m EUR 10-year 0 Europe iTraxx

For the exclusive use of [email protected] 1 year before Equity Bear Market End 1 year after EURO 50 STOXX

Source: Bloomberg, Goldman Sachs Global Investment Research Source: Bloomberg, Goldman Sachs Global Investment Research

Exhibit 47: Significant decline in front-end VIX Exhibit 48: Lower vol but still elevated for risky assets 3m implied volatility percentile last 10y

38 VIX Futures Term Structure 100% Equity Credit 90% Rates 36 Commodity Pre-Election 80% FX 34 (Nov 2) 70% 32

60% 7f100ca895df11e0bb4300215ace2648 Post-Election 30 (Nov 4) 50%

40% 28

Now 30% 26 (Nov 19) 20% 24 10%

22 0% Spot 16-Dec 20-Jan 17-Feb 17-Mar 21-Apr 19-May 16-Jun Jan-18 Jul-18 Jan-19 Jul-19 Jan-20 Jul-20

Source: Bloomberg, Goldman Sachs Global Investment Research Source: Bloomberg, Goldman Sachs Global Investment Research

20 November 2020 21 Goldman Sachs GOAL: Global Opportunity Asset Locator

Exhibit 49: S&P 500, Gold and Oil vol remains elevated, while rates and FX vol is low

Equities Rates Credit Commodities Currencies S&P EURO Nikkei FTSE MSCI MSCI USD USD EUR EUR iTraxx EUR/ JPY/ GBP/ CDX IG CDX HY WTI Gold Copper 500 STOXX 50 225 100 EM EAFE 2-year 10-year 2-year 10-year Europe USD USD USD Implied (3-month ATM, %) Current: 19.9 18.8 18.6 18.0 20.8 16.9 0.9 3.5 1.0 2.1 61.2 53.9 59.2 40.3 16.9 20.4 6.1 6.6 9.1 Percentile: 85% 51% 43% 78% 55% 61% 0% 5% 9% 2% 87% 78% 64% 80% 66% 47% 13% 12% 58% 1M change: -4.3 -3.7 0.3 -3.3 -2.0 -3.0 -0.3 -0.4 0.0 -0.2 -11.7 -5.1 -7.3 -0.2 -1.5 -0.1 -0.7 -0.3 -1.5 Average: 15.7 19.3 19.8 15.4 21.0 17.1 3.0 4.8 2.0 3.7 50.7 46.9 56.7 32.4 15.5 21.8 8.7 9.1 8.9 95th: 26.5 30.6 27.1 24.7 31.5 29.1 4.9 7.1 5.3 6.2 73.7 78.3 86.4 50.4 23.0 33.0 13.6 12.7 12.7 5th: 10.0 12.3 13.8 10.3 15.2 10.4 1.3 3.5 0.9 2.2 38.7 30.7 40.3 17.1 9.7 15.2 5.1 5.8 5.8 Realised (%) 1-month: 22.8 32.5 17.1 24.9 15.8 20.4 0.8 4.8 0.8 2.2 52.2 55.7 61.7 51.7 19.6 12.6 7.0 9.3 8.2 Percentile: 88% 91% 49% 91% 71% 88% 3% 65% 42% 20% 89% 94% 88% 90% 82% 9% 43% 69% 54% Average: 14.5 18.8 19.6 14.8 14.6 13.7 2.7 4.5 1.5 3.3 38.9 34.5 44.0 35.5 15.2 20.0 8.0 8.4 8.3

Source: Goldman Sachs, Goldman Sachs Global Investment Research

2021 Volatility Regime: Lower but not low vol — equity duration risk elevated Our forecast for above-consensus, above-trend global growth next year should help anchor volatility in 2021. And the recent strong growth momentum also points to lower volatility. Historically, the probability of being in a high-volatility regime (top quartile of realised volatility level is 18%) is just 10% if ISM is above 58 (Exhibit 50). The recent large decline of the VIX is in line with a simple model on macro factors, and all of these are expected to turn more friendly in 2021.

That said, some factors that might keep equity volatility more elevated and prevent a low-vol regime. First, there is still considerable uncertainty over the recovery, in part due to COVID-19, and macro volatility is likely to remain high. Second, equity duration has increased with high valuations and market concentration and, although rates vol should remain supportive, that makes risky assets more vulnerable to growth and rate shocks. Both realised and implied volatility have room to decline from current levels, although elevated valuations and lingering uncertainty should temper the decline.

Exhibit 50: High-volatility regimes are unlikely with elevated levels Exhibit 51: An improvment in US growth and normalisation of of ISM economic uncertainty, liquidity and macro volatility should support

For the exclusive use of [email protected] lower level volatility

35% 70 S&P 500 6m realised volatility

Historical Probability of VIX Macro Implied 30% S&P 500 6m Realised Vol above 18% 60 (based on ISM, CPI/GDP dispersion, Ted Spreads, Macro vol) if ISM above… 25% 50

20% 40

15% 30

10% 20

5% 10 7f100ca895df11e0bb4300215ace2648

0% 0 Uncond. > 50 > 52 > 54 > 56 > 58 > 60 90 92 94 96 98 00 02 04 06 08 10 12 14 16 18 20

Source: Datastream, Goldman Sachs Global Investment Research Source: Haver Analytics, Bloomberg, Goldman Sachs Global Investment Research

20 November 2020 22 Goldman Sachs GOAL: Global Opportunity Asset Locator

Opportunities post the reset: vol curve, long-dated vol, short-dated puts, FX vol n European equity puts screen as attractive considering low vol, recent beta to global equity and the rally since November (Exhibit 52). Put spreads can further cheapen cost considering elevated put skew (Exhibit 53). Hedging equity with FX vol also appears attractive - NOK, CAD and AUD screen cheap based on their beta to equity, their implied volatility is screening as cheap. HYG put spreads look also attractive given the low level of credit vol and elevated HYG put skew. n Gold vol is very elevated compared with other safe assets such as Rates and JPY. To position for higher real rates, selling calls on Gold can offer an attractive carry and skew is negative, much in contrast to bonds (Exhibit 54). n Despite the vol reset in the front end, implied volatility curves between 3m and 12m remain inverted or flat across assets (Exhibit 55). Continued vol normalisation might drive steeper vol curves – short maturity options could be an attractive funding strategy for long-dated options in equity. n Only US option markets are still pricing elevated long-dated volatility: selling longer-dated S&P 500 puts can help fund selective overlay hedges. S&P 500 2y vol looks expensive compared with credit protection – the annualised cost of a 2y 80% put on S&P 500 is high vs. buying CDX IG or HY (Exhibit 57). n S&P 500 can help fund cheaper long-dated calls on EURO STOXX 50 and Nikkei 225 (Exhibit 58). S&P 500 long-dated vol also looks expensive relative to long-dated US rates vol, which prices a low probability of a large move up (Exhibit 56). With a more positive correlation between real rates and breakeven, there is potential for long-dated yields to increase in the event of positive growth. n While a weaker Dollar is our base case, selective Dollar upside can help hedge a ‘risk off’, especially if driven by higher US real rates. In this scenario, most assets are likely to suffer except for the Dollar. Across FX, the risk reversal on the EUR screens the best (Exhibit 59). To express our base case for further Dollar depreciation, risk reversal on MXN and CNH screen the best (Exhibit 59). For the exclusive use of [email protected]

Exhibit 52: CAD, AUD, NOK and European equity vol attractive Exhibit 53: Risk-off skew for NOK, HYG, European equity elevated 3m beta to MSCI World (weekly return). Based on 25-delta call implied 25-delta Put skew: (25d Put IV - 50d IV)/ 50d IV. For asset with * based on vol where asset has * (25d Call IV - 50d IV)/ 50d IV

45 WTI 100% 25-Delta 3m Risk-Off Skew Across Assets 90% (Percentile since 2016) 40 80% 35 70% Russell 60% 30 Nasdaq FTSE MIB 50% MSCI EM S&P 500 25 DAX 40% Nikkei 225 HSCEI CAC 40 30% FTSE 100 20 Kospi 7f100ca895df11e0bb4300215ace2648 TLT (US >20y IBEX 20% bonds)* Gold MSCI EAFE

3m 25D Put Implied Vol Implied 25D Put 3m 15 EURO STOXX 50 10% USD/NOK* HYG 0% 10 AUD/ USD USD/ CAD* JPY/ USD EUR/ USD 5 0.0 0.2 0.4 0.6 0.8 1.0 1.2 1.4 3m Beta to MSCI World

* denotes asset implied vol based on 25-delta call * denotes asset implied vol based on 25-delta call

Source: Bloomberg, Goldman Sachs Global Investment Research Source: Goldman Sachs Global Investment Research

20 November 2020 23 Goldman Sachs GOAL: Global Opportunity Asset Locator

Exhibit 54: Gold volatility is elevated vs JPY Exhibit 55: Equity and US Rates implied volatility term structure is Gold vs USD/JPY 3m implied volatility ratio still inverted between 3m and 12m

3.5 Gold vs Yen - 3m Vol Ratio 1.05x 3m vs 12m Implied Volatility Ratio Percentile 10y (RHS) 90%

3 80% 1.00x

2.5 70% 0.95x

2 60%

0.90x 1.5 50%

0.85x 1 40%

0.5 0.80x 30% 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 USD 10y SX5E S&P 500 EUR/USD Gold HYG EUR 10y

Source: Goldman Sachs Global Investment Research Source: Bloomberg, Goldman Sachs Global Investment Research

Exhibit 56: Long-dated equity volatility is elevated compared with Exhibit 57: Long-dated US Equity volatility looks very expensive rates compared with CDX HY spreads

40 S&P 500 2y implied volatility 11 1800 CDX HY spread USD 30y rates 2y implied volatility (RHS) S&P 500 2y 80% put option premium (bps, RHS) 10 1600 35 1400 9 30 1200 8 1000 25 7 800 6 20 600 5 400 15 4 200

10 3 0 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20

Source: Bloomberg, Goldman Sachs Global Investment Research Source: Goldman Sachs Global Investment Research

Exhibit 58: US Equity long-dated vol also looks expensive vs Exhibit 59: EUR risk reversal looks expensive while MXN and CNH

For the exclusive use of [email protected] Europe look cheap

45 EURO STOXX 50 vs S&P 500 2y 50d Vol (Ratio) RHS 1.5x 100% Percentile of 3m Risk Reversal vs USD S&P 500 2y 50d Vol 40 EURO STOXX 50 2y 50d Vol 90% 1.4x 80% 35 Upside vs USD more expensive 1.3x 70% 30 60% 25 1.2x 50% 20 1.1x 40% 15 1.0x 30% 10 20% 0.9x

5 10% 7f100ca895df11e0bb4300215ace2648

0 0.8x 0% 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 EUR CAD NZD AUD JPY CHF BRL SEK GBP MXN CNH NOK

Source: Goldman Sachs Global Investment Research Source: Bloomberg, Goldman Sachs Global Investment Research

20 November 2020 24 Goldman Sachs GOAL: Global Opportunity Asset Locator Equities (3m & 12m Overweight): The bull run in 2021

We are OW equities (3m and 12m) and expect relatively strong returns and above-consensus earnings growth across regions. We do not have strong regional preferences: we are OW non-US markets over 3m and N across regions over 12m. We prefer cyclical and value parts of the market and have reduced defensive/growth exposures, but we retain a barbell approach.

While the outcome of the US election has moderated the positive growth and supportive pro-risk environment in the short term, it hasn’t derailed the broader recovery. We think the approval and distribution of an effective vaccine is likely to boost investors’ confidence in the economic rebound, providing a broadly positive backdrop for global equity markets and we continue to have a more pro-risk, pro-cyclical stance.

We would describe the 2020 bear market as ‘event-driven’, characterized by a much quicker collapse and recovery than in ‘cyclical’ (typically driven by interest rates) or ‘structural’ (preceded by asset bubbles and imbalances) bear markets. This cycle was unusual given the depth of the economic shock, but extraordinary monetary easing and fiscal support have introduced a central bank and government ‘put’, which has reduced scarring and tail risks, and allowed risk premia to moderate quickly.

Exhibit 60: US bear markets & recoveries since the 1800s SPX down 34% since peak on February 19, 2020 Average decline 45 Average length 120 Average time to recover 0 40 Months Months 100 -10 35

30 80 -20 25 60 -30 20

15 40 -40 10 20 For the exclusive use of [email protected] -50 5

-60 % 0 0 Average Structural Cyclical Event Driven Average Structural Cyclical Event Driven Average Structural Cyclical Event Driven

Source: Goldman Sachs Global Investment Research

The powerful rebound in equities from March to October represented the initial ‘Hope’-driven phase of a new bull market, led mainly by valuation expansion as profits collapsed (Exhibit 61 & Exhibit 62). We should now be moving into the longer ‘Growth’ phase in which profits and dividend growth should take over as the main drivers, but returns tend to be lower. Often, the transition between the two phases is marked by 7f100ca895df11e0bb4300215ace2648 heightened volatility and a market setback as investors wait for, or begin to doubt, the recovery that has been priced.

20 November 2020 25 Goldman Sachs GOAL: Global Opportunity Asset Locator

Exhibit 61: Typical phases of the equity market Exhibit 62: The Coronacrisis Despair and Hope phases S&P 500. Average across market cycles since 1973 S&P 500

Real Price return (%) P/E expansion (%) Real EPS growth (%) Real Price return (%) P/E expansion (%) Real EPS growth (%) 80 72 100 61 62 65 79 60 80 44 59 40 60

20 16 40

0 20 -2 -4 -20 -9 0 -1 -30 -40 -20 -15 -43 -41 -60 -40 -34 -31 Despair Hope Growth Optimism Despair Hope

16 months 9 months 49 months 22 months 1.1 months (Feb. 19th to Mar. 23rd) 5.4 months (Mar. 23rd to Sep. 2nd)

Source: Datastream, I/B/E/S, Haver Analytics, Goldman Sachs Global Investment Research Source: Datastream, I/B/E/S, Haver Analytics, Goldman Sachs Global Investment Research

Into the ‘Growth phase’: reasons for a bullish stance

(1) Low inflation and anchored yields The backdrop of low bond yields should be supportive for equity markets, particularly if accompanied by stronger growth. As markets are pricing extremely low inflation expectations, even small surprises could trigger a shift in expectations, which could be supportive for the equity market. Any rise in inflation expectations also leads to more negative real yields – the equity market correlation with real rates has turned sharply negative this year. Historically, equities have delivered the highest annualised returns in periods when inflation is very low (below 1% but rising) (Exhibit 63).

Exhibit 63: Steady returns with range-bound inflation - reversal from extremes tends to be bullish Annualised average monthly, real total returns (data since September 1929, excluding 2020)

25% High Inflation Inflation in-line Deflation/ lowflation

For the exclusive use of [email protected] (above 3%) (between 1-3%) (below 1%) 20% S&P 500 15% 60/40 portfolio US 10-year bonds 10%

5%

0% 7f100ca895df11e0bb4300215ace2648 -5%

-10%

-15% Inflation >3% Inflation >3% Inflation 1-3% Inflation 1-3% Inflation below Inflation below & falling & rising & rising & falling 1% & falling 1% & rising

Source: GFD, Datastream, Haver Analytics, Goldman Sachs Global Investment Research

20 November 2020 26 Goldman Sachs GOAL: Global Opportunity Asset Locator

(2) Strong EPS growth into 2021 Global equity markets should post +34% EPS growth in 2021, rebounding from a sharp 20% decline in 2020 (Exhibit 64). Our equity strategists expect the level of EPS to revert to the pre-pandemic peak by end-2021 in the US and Asia, and only by end-2022 in Europe. While the levels of EPS may still take a long time to recover, next year consensus expectations for EPS growth are strong across regions (Exhibit 65), supported by an above-consensus acceleration in the global economy and in profits in 2021 and 2022.

Exhibit 64: Global EPS growth in 2021 will likely be similar to Exhibit 65: GS top-down y/y EPS growth forecasts previous rebounds out of recessions Orange bars: weighted average of GS EPS growth forecasts. Blue bars: MSCI AC World

40 +80 34 +58 +60 30 +50 +49

+34 +40 +29 20 +23 +24 +22 +16 +12 +16 +12 +17 +20 +9 +15 10 +0 0 -5 -4 -20 -17 -17 -10-16 -10 GS Forecast -40 -32 -38 Consensus -20 -60 -20 FY FY FY FY FY FY FY FY FY FY FY FY ’20 ’21 ’22 ’20 ’21 ’22 ’20 ’21 ’22 ’20 ’21 ’22 -30 87 89 91 93 95 97 99 01 03 05 07 09 11 13 15 17 19 21 S&P 500 STOXX 600 Topix MXAPJ

Source: Datastream, I/B/E/S, Goldman Sachs Global Investment Research Source: FactSet, Compustat, I/B/E/S, Goldman Sachs

(3) Valuations: elevated on an absolute basis, cheaper relative to bonds In absolute terms equities – as for all other markets – look expensive relative to their own history, which could make them more vulnerable to both growth and rates shocks. That said, relative valuations look attractive as equities have de-rated relative to both bonds and credit (Exhibit 66) – metrics such as the ERP and cash flow yield look cheap

For the exclusive use of [email protected] across regions and on most metrics non-US markets look cheap vs. the US.

Exhibit 66: Cross-asset valuation for the US Exhibit 67: The gap between dividend yields and bond yields is Data since 1976 (FCF yield (1990), Credit market data (1997), Government close to levels from the 1950s again BYs (1921), ERP (2001)) Data for S&P 500

Current Historical Metrics Median 15 10 Level Percentile 14 8 EV / Sales 3.0 100% 13 12 6 EV / EBITDA 15.9 99% 11 4 Price / Book 4.0 92% 10 NTM P/E 22.3 96% 92% 9 2 NTM Free cash flow yield 3.8 60% 8 0 7f100ca895df11e0bb4300215ace2648

Equity (SPX) 7 Cyclically Adjusted P/E 27.1 88% 6 -2 ERP (%) 5.7 11% 5 -4 Nominal 10-year Treasury 1.0% 100% 4 3 -6 Real 10-year Treasury -0.8% 87% Rates 2 -8 High Yield YTM 5.4% 100% 93% 1 0 -10 Investment Grade YTM 2.1% 99% 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010 2020 High Yield spread 422bp 64% Dividend yield US 10-year yield Yield gap (RHS) Credit Investment Grade spread 119bp 64%

Source: Compustat, Goldman Sachs Global Investment Research Source: Robert Shiller, Goldman Sachs Global Investment Research

20 November 2020 27 Goldman Sachs GOAL: Global Opportunity Asset Locator

In recent years the ERP has trended up alongside lower yields as they have been accompanied by declining long-term growth expectations and rising risk. As a result, the dividend yield gap is back to the levels last seen in the 1950s and in the first half of the 20th century (Exhibit 67). But, with growth expectations likely to improve and falling uncertainty, and with rates likely only rising modestly, we expect the ERP to compress and a lower cost of equity.

A pro-cyclical tone across sectors, styles, themes and baskets Alongside a more positive risk and growth outlook, we would expect some challenge to the secular leadership of the global equity market, both in terms of geography and sectors. This does not mean the secular attraction of growth stocks (Exhibit 68) should reverse, but record valuation spreads and an inflection point in growth and bond yields point to a period of outperformance of cyclical and value parts of the markets, and we would suggest more diversification across sectors and factors.

We think that the approval/distribution of a vaccine would likely trigger a continued sharp ‘catch-up’ in some cyclical parts of the market which have lagged their typical relationship with activity indicators, such as the ISM. Additionally, together with value, cyclicals are more positively correlated with rising inflation expectations, so further measures to boost global growth via easier policy are likely to favour such a shift.

The stretched valuation spreads in growth and value (Exhibit 69) – which are the highest since the Technology bubble in the late 1990s – could also be supportive. Valuation extremes have rarely triggered changes in market direction or leadership, but they do help to support the ferocity of a shift if fundamentals are perceived to change.

Exhibit 68: Growth has outperformed since the GFC Exhibit 69: Growth has recently started to de-rate versus value Relative price performance in local currency 12m trailing P/E Premium(Discount) of MSCI Growth vs Value indices

210% 180 World US Europe Asia Pacific EM Growth outperforming 170 180% 160 World Value vs Growth

For the exclusive use of [email protected] 150 150% 140 120% 130 120 90% 110 60% 100 90 30% 80 0% 70 60 -30% 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 90 95 00 05 10 15 20

Source: Datastream, Goldman Sachs Global Investment Research Source: Bloomberg, Goldman Sachs Global Investment Research

7f100ca895df11e0bb4300215ace2648 We take a pro-cyclical stance across regions in our sector, thematic and style allocation. We are broadly OW economy-geared, cyclical sectors and UW consumer staples and utilities across regions. Still, in both Europe and US, we continue to like some secular growth sectors such as Healthcare and emphasise an ESG theme, e.g., our European Renewables basket (GSSBRNEW).

In the US we focus on a barbell approach: (1) tactical positions in deep value stocks that benefit from the vaccine and economic normalisation, and (2) stocks with long-term

20 November 2020 28 Goldman Sachs GOAL: Global Opportunity Asset Locator

secular growth prospects that have high growth investment ratios –we recommend OW in Information Technology, Healthcare, Industrials and Materials.

In Europe we remain OW in Banks and Energy, Autos, Basic Resources and Construction & Materials. We remain UW Defensives (such as Food and Telecoms) and we are N Tech. We recommend our Fiscal Infrastructure (GSSTFISC) and Recovery (GSSTRCOV) baskets as both should be geared to economic improvement next year.

In Asia and Japan, we focus on pro-cyclical allocations, upgrading Autos and Transportation and downgrading Healthcare. We like three growth-driven themes: structural (Digital Dozen, dual circulation), recovery (Global cyclicals vs. defensives, earnings recovery, value cyclicals) and targeted alpha (upstream vs. downstream, renewables, strong CNY winners). Our equity strategists also highlight laggard quality cyclical stocks in Japan and, with scope for more restructuring, screen for companies that may be ripe for reorganising their business portfolios.

In EM, the outperformance into next year is likely to come from laggard sectors and countries. Among domestically oriented cyclical sectors, we prefer Banks (and Industrials), and Mexico within Latin America (our preferred region). We like Brazil tactically on the commodities rebound and prospects for a vaccine roll-out. CE-3 markets are likely to be among the main beneficiaries of positive vaccine news given their close ties to heavily-affected markets in Western Europe.

Exhibit 70: Our trade recommendations across regions

Trade recommendations US Europe Japan Asia-Pacific Fiscal Infrastructure basket Laggard quality Digital Dozen Value recovery (GSSTFISC) cyclicals (GSSZDG12) High Growth Investment Ratio Restructuring Global Cycl. vs. Def. Recovery basket (GSSTRCOV) (GSTHHGIR) opportunities (GSSZMSGC vs. GSSZMSDF) Renewables Capex basket High-ranking ESG firms Value Cyclicals (GSSBRNEW) (GSJPCPEX) Japan Cyclicals

For the exclusive use of [email protected] Renewables (GSJPCYCL) Womenomics basket Strong CNY winners (GSJPWJDL)

Source: Goldman Sachs Global Investment Research

Regional allocation — 3m OW non-US markets, neutral 12m We forecast strong returns across all equity market. We do not have strong regional preferences but near-term the prospect of a weaker US Dollar and fading global risks points to a narrowing of the performance gap relative to the US and a

recovery in laggard regions such as Europe, Japan and EM. We are OW non-US 7f100ca895df11e0bb4300215ace2648 markets for 3m and neutral across regions over 12m.

The outperformance of the US vs. non-US equity markets post-GFC has been mainly driven by stronger earnings growth and sector composition, i.e., an overweight in growth sectors such as Technology and Healthcare, while Japan and Europe are more levered to cyclical sectors (Exhibit 72). Therefore, should we get a rotation towards more cyclical- and even value-oriented industries, we would expect a shift in relative returns,

20 November 2020 29 Goldman Sachs GOAL: Global Opportunity Asset Locator

particularly if the USD weakens.

As Exhibit 73 shows, in USD terms, non-US equity markets tend to outperform when the Dollar is weak. An improved trajectory for the global economy should also benefit stock markets outside of the US disproportionately due to their higher sensitivity to global growth. Additionally, emerging markets and parts of Europe (Germany in particular) look particularly cheap relative to forward expected earnings.

Exhibit 71: Total return forecasts (in local currency and USD) and the allocation relative to benchmark on 3- and 12-month horizons

3-month 12-month Price Return Price Return Total return Current Level Wgt Local USD Level Wgt Local USD Local USD S&P 500 3582 3700 N3%3 % 4300 N20%20 % 22 % 22 % MSCI Asia Pac ex Japan 620 650 OW 4 % 5% 700 N12%13 % 14 % 15 % TOPIX 1726 1750 OW 1 % 2 % 1875 N9%13 % 11 % 15 % STOXX Europe 600 388 405 OW 4 % 3% 430 N11%17 % 14 % 20 %

Source: Datastream, Bloomberg, Goldman Sachs Global Investment Research

Exhibit 72: Index sector composition Exhibit 73: Broad Dollar weakness has historically coincided with non-US vs. US equity outperformance Equity performance in USD AC GICS Sector U.S. Europe Japan APxJ World 210 130 Energy 2.0 4.1 0.5 3.1 2.9 190 125 Materials 2.6 7.8 5.0 5.9 4.7 170 120 Industrials 8.5 14.7 20.6 5.5 9.9 115 Consumer Discretionary 11.7 11.1 18.5 18.2 12.7 150 110 Consumer Staples 6.6 14.2 7.8 5.2 7.8 130 Health Care 14.0 15.3 11.2 6.0 12.3 105 110 Financials 9.9 15.3 8.6 19.9 13.2 100 90 Real Estate 2.8 1.4 3.5 4.7 2.8 95 Information Technology 28.0 7.2 12.9 18.0 21.0 70 90 Communication Services 11.0 4.1 10.0 11.3 9.5 50 85 Utilities 3.0 5.0 1.4 2.2 3.2 Total 100.0 100.0 100.0 100.0 100.0 30 80 73 76 79 82 85 88 91 94 97 00 03 06 09 12 15 18 US vs. Europe equity US vs. non-US equity Real USD TWI (RHS)

For the exclusive use of [email protected] Source: MSCI, FactSet, Goldman Sachs Global Investment Research Source: Datastream, Worldscope, Haver, Goldman Sachs Global Investment Research

Global: Global Strategy Views: Global Strategy Outlook: The Bull Run in 2021, November 12, 2020

US: 2021 US Equity Outlook: Roaring ‘20s Redux, November 11, 2020

Europe: Europe Equity Strategy: 2021 Outlook: A V(alue)-shaped recovery, November 11, 2020

Asia: Asia-Pacific Portfolio Strategy: 2021 Outlook: The sweet spot between growth and 7f100ca895df11e0bb4300215ace2648 rates, November 11, 2020

Japan: Japan Portfolio Strategy: Cyclical Stocks in the Year of the Ox, November 10, 2020

EM: EM Market Outlook 2021: From Resilience to Outperformance, November 17, 2020

Contributors: Peter Oppenheimer, David Kostin, Tim Moe, Kathy Matsui, Sharon Bell, Ceasar Maasry, Cecilia Mariotti

20 November 2020 30 Goldman Sachs GOAL: Global Opportunity Asset Locator Government Bonds (3m & 12m UW): Robust recovery, shallow selloff

After another year of solid fixed income returns, we see the duration portion of investor portfolios yielding flat to negative returns next year. We forecast modestly higher yields across G10 markets, mostly in line with forwards despite our above-consensus 2021 economic growth forecasts – largely on a more tempered medium-term inflation and growth outlook. In terms of the trajectory, we see benchmark yields trading sideways in the near term before reflation themes reemerge in 2Q2021. Our YE2021 forecasts for key 10y yields are: US 1.3%, Germany -0.4%, Japan 0.10%, and UK 0.5%. Further upside to yields would require a sustainable pick-up in realized inflation as well, which we see as some time further away.

Global duration: no obvious misalignment to fundamentals We expect higher yields by year-end 2021 across most of the G10, though our forecasts are largely in line with forwards. The exceptions here are the US, where we expect a modest overshoot above forwards (Exhibit 74), and some smaller open economies like New Zealand, where we believe yields have overreacted to recent positive vaccine news. The high reported efficacy on the Pfizer vaccine has understandably resulted in a trimming of the negative tail scenario, allowing for a move higher. However, over the next few months, we expect a modest retracement as downbeat news on the near-term trajectory of the pandemic dominates – a portion of the recent repricing reflects a temporary increase in bond risk premia, in our view.

Exhibit 74: We expect total returns will turn modestly negative next year Total return for 10y USTs, per unit of duration risk

bp bp 250 250 200 194 For the exclusive use of [email protected] 200 200 164 150 135 129 150 107 84 100 68 100 52 50 50 22 32 50 4 11 14 0 0 -15 -50 -28 -23 -50

-100 Projected -100 -89 -150 -150 -129 7f100ca895df11e0bb4300215ace2648

-200 -200 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 21

2020 and 2021 are implied total returns if GS forecasts are realized

Source: Bloomberg, Goldman Sachs Global Investment Research

With divided government the most likely election outcome in the US, organic economic recovery and progress on mass vaccination will be the prime driver of reflationary

20 November 2020 31 Goldman Sachs GOAL: Global Opportunity Asset Locator

pricing, not expansionary fiscal policy. The lack of a significant fiscal impulse removes the “right tail” and upside risks to the economy that would have required much higher bond risk premia. That said, we believe this less turbocharged recovery will nonetheless be sufficiently robust to result in longer-term forward real yields migrating towards the neutral rate (r*), which we believe remains substantially above the current forwards. For 10y USTs, in addition to this move, which could contribute about 10bp of upside to 10y real yields, we also expect a roughly 30bp increase in 10y breakevens over the course of the next year. In both the real and inflation components, we expect much of the shift could occur in expectations as we draw closer to eventual liftoff. After the recent term premium-led selloff, our model suggests that risk premia may modestly decline in 2021, and much of the repricing could come from a shifting expectation window (Exhibit 75).

On cross-market yield spreads, we see downside risk to the 10y UST-Bund spread over the next few months, though we see it widening from 2Q21 onward (we anticipate it will shift from around 140bp now to 170bp by YE2021); while wide availability of the vaccine should help both regions, fundamentals related to a divergent inflation trajectory should reassert themselves later next year when it comes to nominal bond pricing.

Markets appear too optimistic on policy rate normalization Markets generally appear to be under-appreciating how tied policy normalization is likely to be to inflation outcomes. As can be seen in Exhibit 76, markets are substantially ahead of our projections in most cases. Our economists expect later liftoff despite above-consensus growth forecasts in most cases because they expect slow progress in sustainably hitting inflation targets. Indeed, in most regions the inflation mandate may prove to be the binding constraint to achieving liftoff. Given this, we would be inclined to fade instances where markets run well ahead of our projections, particularly when markets that are pricing an early liftoff are also pricing a steeper normalization path; some of the best carry positions across G10 are inflection points on yield curves around liftoff. The sequencing of growth and inflation readings next year that produces bouts of optimism may in fact end up offering the best opportunities to pursue For the exclusive use of [email protected] this “pushback” strategy.

Exhibit 75: With term premium already having repriced, the move Exhibit 76: Markets appear to be anticipating policy liftoff too soon, higher in yields should come from the expectations component in our view Model-implied estimated impact on 10y US yields Timing of policy rate liftoff in G10, market vs GS

bp bp 50 50 70

40 40 GBP 60 30 30 CHF NZD 20 20 EUR 50 AUD 10 10 CAD USD 7f100ca895df11e0bb4300215ace2648 SEK 0 0 40 -10 -10 NOK

-20 -20 30 -30 -30 Months to firsthike, GS

-40 -40 UR QE Growth Inflation GDP, CPI Total, Expectations Total 20 dispersion Term 20 30 40 50 60 70 and skew Premia Months to first hike, market

Source: Goldman Sachs Global Investment Research Source: Goldman Sachs Global Investment Research

20 November 2020 32 Goldman Sachs GOAL: Global Opportunity Asset Locator

Flat forward curves argue for steepeners Across most G10 economies, front-end curves (2s5s) are likely to remain relatively stable, or only modestly steepen, given the unchanged policy rate path we are projecting over the next few years. More broadly, the relative cheapness of the belly has led the market to price fairly flat belly/long-end forward curve. In contrast, we expect shifts in perceptions of the policy rate path and the neutral rate should lead to upward movement in the 5s10s portion of the yield curve via the expectations channel, particularly in the US. While the real expectations component at longer maturities should increase due to the migration towards the neutral rate, at the 5y point, real policy rate averages ought to price lower than where they are. On net, this should imply significantly steeper real yield curves. Combined with our view for modest flattening of the inflation curve in this sector, we expect about 25bp of steepening of the 5s10s UST curve.

While the high efficacy reported on the Pfizer vaccine appears to have spurred yield curve steepening (excessively so in the near term, in our view), forward yield curves remain too flat due to the recent cheapening of the belly (Exhibit 77). We find 1y forward US 5s30s (vol-weighted) steepeners particularly attractive as a way to monetize this. In the UK we expect some clearing of Brexit risk, the supply backdrop, and the cyclical recovery to lead long-end yields higher and support 2s30s steepeners.

G3 inflation outlook: varying upside Inflation pricing over the next two years appears too downbeat in the US (see Exhibit 78) and Euro area, too upbeat in the UK. While slack-sensitive sectors may be somewhat of a drag over the next few years, COVID-affected components of inflation should provide an offsetting boost next year. Additionally, our commodity teams’ outlook for energy prices presents upside for near-term traded inflation if it materializes. In Europe, while the degree of slack points to subdued inflation for the coming years, we think the market is likely overstating the degree of near-term weakness.

For the exclusive use of [email protected] Exhibit 77: While long-end forward curves appear too flat across Exhibit 78: The US and Euro area are underpricing our economists’ G4, the US is likely to also experience steepening in the belly inflation forecasts; UK traded inflation appears rich GS projected sovereign curves versus forwards y/y headline inflation priced by inflation swaps vs. GS econ forecasts

% GS Forecasts minus Forwards % % Market CPI 2021 Market CPI 2022 % 0.3 mid 2021 end 2021 0.3 3.5 GS Forecast 2021 GS Forecast 2022 3.5

3.0 3.0 0.2 0.2

2.5 2.5 0.1 0.1 2.0 2.0

0.0 0.0 1.5 1.5 7f100ca895df11e0bb4300215ace2648 -0.1 -0.1 1.0 1.0

0.5 0.5 -0.2 -0.2 USD DEM GBP JPY USD DEM GBP JPY 0.0 0.0 5s10s 10s30s USD EUR GBP

Source: Bloomberg, Goldman Sachs Global Investment Research Source: Goldman Sachs Global Investment Research

Looking further out the inflation curve we expect to see somewhat greater variation between the US and Europe, where, energy-driven strength notwithstanding, the US is

20 November 2020 33 Goldman Sachs GOAL: Global Opportunity Asset Locator

likely to see more upside in the belly (while the front-end should lead in Europe). Ultimately we see scope for 5y5y breakevens to widen about 35bp by end 2021, which would take them towards levels that prevailed in 2018, while for spot 5y breakevens and for longer term forwards (10y20y) we think upside is somewhat closer to 25bp. In Europe, we think there is limited room for inflation forwards at the long end to reprice higher, favoring HICP curve flatteners going into next year.

In terms of the impact of average inflation targeting, our interpretation of the Fed’s AIT framework suggests the natural shape of the belly/long end should be one of inversion while the front-end of the inflation curve should be much more reliant on the cyclical recovery discussed above. One point to make is that even if inflation were to evolve along the lines laid out, markets may not be willing to price those outcomes in advance—historical experience from the late 1960s through early 1990s suggests that structural shifts in inflation expectations take time (see here).

Policy support eclipses diverging fundamentals within Europe With the ECB having achieved a compression in spreads and a reduction in volatility, and with policy support likely priced near a local maximum as we head into the December ECB meeting, the hurdle for further ECB-driven compression is high. It is therefore up to other drivers, namely a vaccine-driven growth boost to tighten spreads further. We estimate that the growth boost expected as a result of the vaccine is worth an incremental 10-20bp in spread compression. However, given the strong influence of ECB policy, we think the starting point for spreads is already rich to macro valuation, and so will be highly sensitive to any reversal in expectations for policy support.

Overall, we expect sideways movement in spreads throughout the year — the start of the year is likely to bring the most favorable conditions for spreads, with policy support at a maximum, a positive cyclical inflection resulting from a vaccine, and relative political calm. Towards the end of 2021 we will be through the acceleration phase of growth, policy support will be (presumably gently) withdrawn, and the political calendar will be

For the exclusive use of [email protected] heating up. For this reason, we are less confident that sovereign spreads end 2021 at substantially tighter than current levels.

Vol repricing: mainly mechanical We see some pick-up in rate volatility next year alongside the move to higher yields. Generally speaking, the level of vol has a strongly positive relationship with the level of rates across expiry and tail combinations, particularly with yields closer to the effective lower bound (ELB). Over the next year, we expect intermediate rates (7y and 10y tails) will add the most distance (relatively speaking), and should mechanically see a greater 7f100ca895df11e0bb4300215ace2648 increase in (normal) vol as a result. Because shorter maturities are likely to remain fairly well anchored, so should vol on these tenors. With respect to timing, we find historically that vol changes are on average more strongly directional with rate changes when the Fed is at the ELB; given that this reflects the current regime, we would expect vol increases to coincide with moves higher in yields.

For rates markets like the UK where the perceived hurdle to further policy rate cuts is lower than it is for the Fed, the greater potential for the market to reassess the lower

20 November 2020 34 Goldman Sachs GOAL: Global Opportunity Asset Locator

bound means that vol may not be quite as strongly directional with yields as we expect it to be in the US. Even in these economies, however, because the magnitude of cuts being discussed are relatively small, deviation from the vol-rate relationship should also be small.

Exhibit 79 shows forecasts under a divided US government assumption, as well as deviations from forwards over the next year. As can be seen, most of our forecasts are in line with forwards, with US modestly above, and New Zealand somewhat below. We are neutral on benchmark 10y yields in most places. We expect some widening of cross-market yield spreads—the UST-Bund spread could approach 170bp over the next year (from around 140bp currently).

Exhibit 79: G10 yield forecasts and deviation from forwards

G10 10-Year Yield Forecasts USD DEM GBP JPY CAD CHF SEK NOK AUD NZD spot 0.88 -0.54 0.35 0.03 0.72 -0.47 0.03 0.83 0.89 0.85 4Q20 0.75 -0.60 0.20 0.00 0.65 -0.50 0.00 0.70 0.70 0.50 1Q21 0.85 -0.55 0.20 0.00 0.70 -0.45 0.00 0.70 0.75 0.55 2Q21 1.00 -0.50 0.30 0.05 0.80 -0.40 0.05 0.80 0.80 0.55 3Q21 1.15 -0.45 0.40 0.10 0.90 -0.40 0.05 0.80 0.90 0.60 4Q21 1.30 -0.40 0.50 0.10 1.00 -0.35 0.15 0.90 1.00 0.70 1Q22 1.40 -0.30 0.60 0.15 1.10 -0.30 0.25 1.00 1.10 0.80 2Q22 1.50 -0.25 0.70 0.15 1.15 -0.25 0.35 1.10 1.20 0.90 3Q22 1.60 -0.15 0.75 0.20 1.20 -0.20 0.45 1.20 1.30 1.10 4Q22 1.65 -0.10 0.80 0.20 1.25 -0.15 0.50 1.30 1.40 1.20 1Q23 1.70 0.00 0.85 0.20 1.30 -0.10 0.55 1.35 1.45 1.30 2Q23 1.75 0.10 0.90 0.20 1.35 -0.05 0.60 1.40 1.50 1.40 3Q23 1.80 0.15 0.95 0.25 1.40 0.00 0.65 1.45 1.55 1.50 4Q23 1.85 0.20 1.00 0.25 1.45 0.00 0.70 1.50 1.60 1.60 1Q24 1.90 0.25 1.05 0.25 1.50 0.05 0.70 1.55 1.65 1.70 2Q24 1.95 0.30 1.10 0.25 1.55 0.05 0.75 1.60 1.70 1.80 3Q24 2.00 0.35 1.15 0.30 1.60 0.10 0.75 1.65 1.75 1.85 4Q24 2.05 0.40 1.20 0.30 1.65 0.10 0.80 1.70 1.80 1.90

Deviation from Forwards USD DEM GBP JPY CAD CHF SEK NOK AUD NZD 4Q20 -0.16 -0.08 -0.20 -0.04 -0.11 -0.03 -0.01 -0.14 -0.21 -0.36 1Q21 -0.10 -0.06 -0.26 -0.07 -0.11 -0.02 -0.02 -0.16 -0.20 -0.33

For the exclusive use of [email protected] 2Q21 0.00 -0.03 -0.19 -0.04 -0.04 0.00 0.01 -0.08 -0.20 -0.37 3Q21 0.11 0.00 -0.12 -0.01 0.03 -0.02 -0.02 -0.11 -0.15 -0.37 4Q21 0.21 0.03 -0.05 -0.03 0.10 0.01 0.03 -0.03 -0.09 -0.32 1Q22 0.27 0.11 0.02 0.00 0.17 0.04 0.09 0.05 -0.04 -0.27 2Q22 0.32 0.14 0.09 -0.02 0.19 0.07 0.15 0.13 0.02 -0.22 3Q22 0.38 0.22 0.11 0.01 0.21 0.10 0.22 0.22 0.07 -0.07 4Q22 0.38 0.25 0.12 -0.02 0.23 0.13 0.24 0.30 0.12 -0.02

Source: Goldman Sachs Global Investment Research

For details see:

Global Rates Outlook: Robust Recovery, Shallow selloff, November 16, 2020 7f100ca895df11e0bb4300215ace2648 Euro Area Sovereign Outlook 2021: The Point of No Returns, November 19, 2020

Contributors: Praveen Korapaty, George Cole, William Marshall, Avisha Thakkar

20 November 2020 35 Goldman Sachs GOAL: Global Opportunity Asset Locator Credit (3m &12m Neutral): Same direction, different magnitude

We expect credit spreads will continue to inch to their pre COVID-19 levels. While the near-term growth path may prove bumpy, a better outlook for next year following recent positive vaccine developments, the accommodative stance of monetary policy, direct central bank interventions, and a remarkably supportive supply/demand technical backdrop should support credit risk appetite, in our view. Valuations limit long-term upside relative to the stellar performance since late March, but credit will likely deliver decent excess returns and solid Sharpe ratios in 2021. We generally favor a down-in-quality stance and pro-cyclical and “disrupted” sectors.

DM Credit: Decent returns; strong Sharpe ratios After being range bound for the last several months, spreads have once again resumed their downward trend towards pre-pandemic levels (Exhibit 80), grinding tighter on two key recent developments: resolution of the US election event risk and positive vaccine news. Clarity on these fronts should allow investors to refocus on macro fundamentals after a year in which tail risks were in the driver’s seat. However, although it is yet to be determined how smooth the near-term path will be, with waning fiscal support, surging virus infections and renewed restrictions, particularly in Europe, having two efficacious vaccines in late-stage trials is an unequivocally positive milestone.

The question is whether investors will be able to look through near-term risks or reprice spreads wider if expectations are not met. Having said that, in the medium-term we remain optimistic on the recovery, and while spread valuations clearly limit long-term upside relative to the stellar performance since late March, Exhibit 81 shows that we continue to be of the view that there is more scope for further tightening across currencies given the likely decline in volatility on a forward basis over the coming year.

For the exclusive use of [email protected] Exhibit 80: Spreads have recently resumed their tightening, inching Exhibit 81: We expect USD and EUR spreads will revert to their closer to pre-pandemic levels pre-pandemic levels EUR IG and USD IG OAS IG and HY spread forecasts for USD and EUR markets

bp Recessions EUR USD bp Updated through November 17, 2020 700 700 Sector Current 2020Q4 2021Q1 2021Q2 2021Q4 600 600 USD Spreads 500 500 IG 112 110 103 101 100 IG Fin 99 102 97 95 94 400 400 IG Non-Fin 117 118 109 107 106 High Yield 427 400 370 350 340 300 300 EUR Spreads

200 200 IG 107 105 100 97 96 7f100ca895df11e0bb4300215ace2648 IG Fin 117 112 106 102 99 100 100 IG Non-Fin 102 98 96 94 92 High Yield 396 385 365 340 330 0 0 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20

Source: Bloomberg Barclays , Iboxx, Goldman Sachs Global Investment Research Source: Bloomberg Barclays, Iboxx, ICE-BAML, Goldman Sachs Global Investment Research

We generally favor a down-in-quality stance. Our relative value views include: 1. Overweight HY vs. IG in both the USD and EUR markets; 2. Overweight CCCs, neutral

20 November 2020 36 Goldman Sachs GOAL: Global Opportunity Asset Locator

Bs and underweight BBs; 3. Overweight AT1s vs. HY bonds in the EUR market; 4. Overweight 30-year spreads vs. 10s in USD IG; 5. Steeper USD HY spread curves; 6. Overweight leveraged loans vs. HY bonds in the USD market; and 7. Overweight IG-rated CLO tranches vs. IG corporate bonds.

In line with our overall view of strong growth in the upcoming year, we expect that defaults will further normalize in the US, and forecast the 12-month trailing default rate will decline to its long-run average of 4% by year-end 2021, from its recent level of 8.3%, shown in Exhibit 82. While the risk of a second wave of defaults is not trivial, especially if additional business restrictions are implemented and another round of stimulus from Congress does not materialize, it is not our modal expectation at this point.

Relative to the US, in Europe the default picture remained much more benign over 2020. For context, the 12-month trailing default rate stood at 4.2% by the end of October (Exhibit 82). This isn’t unusual for European firms, as defaults were also lower than in the US during the aftermath of the global financial crisis in 2009, but the gap appears to be more pronounced this time around.

However, we believe that large firms that have access to debt capital markets will not experience many defaults in 2021, due to relatively easy funding conditions. But the prospect of diminishing direct government support will likely pressure smaller firms that lack financial flexibility, thereby fueling a modest uptick in the default rate. For the bond market as well as macro synthetic indices, we think these defaults will have virtually no impact on performance, as they will be predominately focused on smaller issuers.

Exhibit 82: US defaults likely peaked earlier this year; by contrast, the default rate in Europe has only modestly increased The 12-month trailing issuer-weighted default rate for US and European HY firms

% % Recessions US Europe 18 18 For the exclusive use of [email protected]

16 16

14 14

12 12

10 10

8 8

6 6 7f100ca895df11e0bb4300215ace2648 4 4

2 2

0 0 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20

Source: Moody’s, Goldman Sachs Global Investment Research

Putting all of this together at macro level, we recommend reaching down in quality

20 November 2020 37 Goldman Sachs GOAL: Global Opportunity Asset Locator

within corporate credit and favour being overweight HY vs IG in both the USD and EUR markets. While Exhibit 83 shows that this theme has been relatively range-bound over the few past months, we expect two key drivers will likely break this trend and fuel spread compression going forward. The first is strong search-for-yield motives, given the combination of the recent contraction in volatility in light of the US election results/positive vaccine headlines and the anchored low levels of absolute yields across the fixed income universe. The second is our expectation defaults will likely be benign in 2021.

However, as mentioned above, one key risk to this view is if the gap between vaccine approval and distribution is longer than anticipated. In particular, it remains an open question as to whether the market would continue to look through negative news or reprice lower amid any more restrictions being reintroduced. However, while the path is somewhat narrow, we continue to hold the view that these tail risks are just that, tail-risks, and feel comfortable with compression across markets overall.

Exhibit 83: The compression theme has been relatively range-bound in the USD market while it has underperformed in the EUR market HY/IG spread ratio in the USD and EUR markets

Ratio Ratio USD EUR (RHS) 4.3 4.1

3.9 4.1

3.7

3.8

3.5

HY underperforming 3.6

For the exclusive use of [email protected] 3.3

3.3 3.1 May Jun Jul Aug Sep Oct Nov

Source: Bloomberg Barclays, Iboxx, Goldman Sachs Global Investment Research

EM Credit: Still upside, led by HY - left-tail risks linger, but the risk premium still screens as attractive

The COVID-19 shock brought the spread differential between EM IG and HY sovereigns 7f100ca895df11e0bb4300215ace2648 to a historical high (Exhibit 84). In EM IG, spreads have normalized to pre Covid-19 levels for most sovereigns, with many sovereigns funding at all-in yields that were lower than pre-pandemic levels. In our view, this is a reflection of having benefited from the spillovers of DM central bank policies to ease liquidity and funding pressures and support credit markets directly. In addition, IG sovereigns were better positioned to face the Covid-19 shock given their lower external vulnerabilities.

20 November 2020 38 Goldman Sachs GOAL: Global Opportunity Asset Locator

Conversely, the still wide spreads across EM HY sovereigns likely reflect concerns around sovereign defaults and the scarring effects on the fiscal balance-sheets from Covid-19. In 2020 alone, three sovereigns defaulted on their Eurobonds (Lebanon, Ecuador and Zambia), and two restructured within the grace period (Belize and Suriname1). That has brought the default rate to ~4% for the EMBI index (~6.5% for HY), which is at the higher end of the recent historical range (Exhibit 85).

Going into 2021, the sharp rise in public debt levels following Covid-19 is likely to leave a number of sovereigns still at risk of default. However, we find that wider spreads compensate for these risks, leaving the risk-premium in EM HY at the higher end of the historical range. Moreover, on an index level, a ~4% default rate for the EMBI Global Diversified Index is still relatively benign compared to US HY Credit, where we forecast a default rate of ~8.50% for 2020.

As such, we see room for further spread compression on an index level, driven mostly by a spread compression in HY, where spreads are still relatively wide. More specifically, we forecast the EMBI Global Diversified Spread to tighten by ~50bp to ~325bp in the next 12 months.

Exhibit 84: EM credit spreads are still at the wider end of the Exhibit 85: Still wide spreads in EM HY partly reflects higher historical range, driven by HY left-tail risks, with a number of sovereigns still at risk of default Percentile ranks refer to 2007-2020

Number of Sovereigns which screen at risk of default (lhs) Number of bp defaults, default Bond Restructurings & Defaults (lhs) sovereigns 750 rate (%) EMBI Global Diversified Spread 12 Annual Default Rate (lhs) 80 Number of EM Sovereigns in the index (rhs) 650 70 EM HY vs IG 10 60 550 8 50 450 93%ile 6 3.8 40 4.9 4.1 4.1 3.0 4.5 30 350 76%ile 4 2.4 2.5 1.8 1.4 20 1.5 1.3 250 2 10

150 0 0 For the exclusive use of [email protected] 12 13 14 15 16 17 18 19 20 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 21

EM HY and IG refer to benchmark-weighted sovereign and quasi sovereign USD bond spreads differentiated by rating. EM HY excludes Argentina and Ecuador. Source: Bloomberg, Goldman Sachs Global Investment Research

Source: Bloomberg, Goldman Sachs Global Investment Research

For details see:

2021 Global Credit Outlook: Same direction, different magnitude, November 18, 2020

EM Market Outlook 2021: From Resilience to Outperformance, November 17, 2020

Contributors: Lotfi Karoui, Amanda Lynam, Michael Puempel, Sara Grut 7f100ca895df11e0bb4300215ace2648

1 In Suriname, the bond restructuring is ongoing.

20 November 2020 39 Goldman Sachs GOAL: Global Opportunity Asset Locator Commodities (3m N and 12m OW): REVing up a structural bull market

We are N commodities for 3m but would shift OW for 12m as we see a new structural bull market. As demand recoveries meet restrained supply due to structural under-investment, we see upside in almost all commodity markets. Non-energy commodities face immediate upside supported by Chinese demand and adverse weather shocks. We expect copper prices to end 2021 at $7500/mt. Because of high inventories, upside in oil will likely come after the winter - we expect Brent at $65/bbl from the fall of 2021 to early 2022. This should support the S&P GSCI Enhanced index. Near term gold may be range-bound but we maintain our $2,300/toz target, supported by declines in 5yr US real rates and a weaker Dollar.

It’s easy – and largely accurate – to present the 2021 commodity outlook as a V-shaped vaccine trade. What we think is key, however, is that this recovery in commodity prices will actually be the beginning of a much longer structural bull market for commodities driven by three key themes:

1. Revenge of the old economy. Structural under-investment in the old economy due to a decade of poor returns, particularly in energy where ESG issues have further reduced investment, was accelerated during 2020 in response to Covid, leaving inadequate production capacity to meet a V-shaped vaccine-driven demand recovery. Investment decisions are at a historical trough, taking 7.9 mn bld of oil out of 2025 expected supply. In our view, this will spell the end of non-OPEC growth in 2021. 2. REV’ing demand through social need. Covid is already ushering in a new era of policies aimed at social need instead of financial stability. This will likely create cyclically stronger, more commodity-intensive economic growth that should create the elusive cyclical upswing in demand. Three global initiatives have the potential to REV the global demand for commodities: Redistributional policies, Environmental

For the exclusive use of [email protected] policies and Versatile supply chain initiatives. From China’s new 5YP to Europe’s Green Deal or Biden’s stimulus plan, policymakers are looking to REV demand after a decade of policies aimed at financial stability. 3. Revaluation and reflation. Covid has led to a massive rise in government spending, particularly in the US where the dollar was already facing headwinds. Although the dollar got a boost from a flight to safety at the beginning of the crisis, this support is likely to fade in 2021 and beyond, creating a positive feedback loop similar to what it did during the 1970s and 2000s when oil and gold reached historical highs. In addition, inflation tail risks are greater than at any other time since the 1970s due to 7f100ca895df11e0bb4300215ace2648 the REV policies above.

Over the past decade the GSCI is down c.60%, erasing 3 decades of gains. We believe this streak of poor returns has reached an end in the aftermath of the Covid crisis. Indeed, the mid-cycle trap, not supply, created the lost decade. In oil, OPEC+ in the spirit of ‘market stability’ offset shale increases, or in metals Chinese ‘supply-side reforms’ did the same. In our view, it was the inevitable consequence of global policy focused on financial-stability following the financial crisis. Such policies, by definition,

20 November 2020 40 Goldman Sachs GOAL: Global Opportunity Asset Locator

took risk out of the system, and along with it many of the drivers of strong demand growth that would potentially have created inflation, a commodity bull market.

The financial crisis was a crisis of financial instability whereas the Covid pandemic is a crisis of social need, the need to deal with political issues that can no longer be ignored such as inequality, climate change and structural unemployment in key sectors and demographics. Policies aimed at social need benefit lower-income households that are larger in number and volumetrically consume more goods. Such social need policies help escape the mid-cycle trap.

Stimulus aimed at social need creates far more growth than stimulus aimed at fixing a financial crisis. And more importantly, it can create a cyclical upswing in demand to finally reach escape velocity to solidly enter a period of above-capacity growth, helping commodities and the old economy out of the mid-cycle trap they have been in for the past decade which lies at the core of the poor performance. Even the US Fed in announcing its new framework, acknowledges a cyclically strong economy helps solve many of these social issues.

This will create a structural bull market on par with the 2000s. Looking at the 2020s, we believe that similar structural forces to those which drove commodities in the 2000s could be at play. Not only can the green capex increase be as big as BRIC’s investment 20 years ago, but the redistributative push in DMs, and in China this time, is likely to lead to a large boost to consumer spending, comparable to the lending-fuelled consumption increase in the 2000s. Finally, similar to 2000s, there is structural under-investment in supply of almost all commodities, against a weak dollar backdrop. As a result, we recommend going long our “Back to the USSR” basket of copper, crude, corn, soy, platinum and palladium.

Exhibit 86: We are opening our “Back to the USSR” trading Exhibit 87: Nearly all commodity markets are already drawing recommendation inventory Yoy change in inventories as a % of US/global demand

Commodity Contract Opening Price Current Price % Return For the exclusive use of [email protected] S&P GSCI 4% Copper 4241 4241 0% Subindex ER S&P GSCI 2% Brent Crude 176 176 0% Subindex ER S&P GSCI 0% Corn/Soybeans 2147 2147 0% Subindex ER S&P GSCI -2% Palladium/Platinum 1736 1736 0% Subindex ER -4% Total Return 0%

*Corn/Soy and Platnium/Palldium are pair, each taking a 12.5% weighting in the basket -6%

-8%

-10%

-12% Cocoa Iron Wheat Live Lean Sugar Copper Corn Crude Cotton Gas Soy

Ore Cattle Hogs 7f100ca895df11e0bb4300215ace2648

Source: Goldman Sachs Global Investment Research Source: Goldman Sachs Global Investment Research

In the near term, the longer the current crisis drags on, the larger the social need and policy response; however, once the normalization begins (whether that is in 2H21 as our economists are forecasting, or later, should vaccines disappoint), a V-shaped recovery in demand will almost certainly face tight supply across all markets. As we have emphasized over the past month, nearly every commodity is in a deficit, including oil

20 November 2020 41 Goldman Sachs GOAL: Global Opportunity Asset Locator

today, despite lockdowns. Such broad-based deficits are usually only seen late in the business cycle.

Exhibit 88: S&P GSCI Index Forecasts

Historical Performance GS Forecast Dollar GSCI Commodity Index Weight 2020 2018 2019 3m 6m 12m YTD„ S&P GSCI 100.0 -12.9 17.4 -27.7 3.4 9.4 26.8 Energy 62.6 -13.9 28.5 -45.7 4.6 12.7 40.1 Industrial Metals 11.2 -18.0 2.8 9.8 -0.1 1.5 3.0 Precious Metals 4.1 -3.6 17.7 22.4 20.7 20.2 19.2 Agriculture 15.4 -7.0 -1.6 4.0 -0.7 0.3 -1.0 Livestock 6.7 -2.2 -5.4 -25.0 -2.9 5.4 10.6 „ YTD returns through Nov 16, 2020

Source: Goldman Sachs Global Investment Research

Energy We expect a second wave of lockdowns in Europe and the US to bring the oil market’s rebalancing to a halt in the coming months. Our expected peak 3.1 mb/d associated hit to oil demand, while smaller than in April 2020 given lighter restrictions, will nonetheless bring the oil market rebalancing to a halt, on our forecasts. The increase in inventories that we anticipate is likely to remain modest, however, as we expect OPEC to delay its planned January ramp up by three months. Importantly, this is only a speed bump in our forecast of a sharp tightening of oil fundamentals through 2021, driven by a recovery in demand, boosted by vaccines and rapid testing, and by the collapse in upstream investment and change in the shale reaction function. Accounting for this winter Covid delay, we now expect the oil market rebalancing to occur next year, with normalized OECD stocks, OPEC+ spare capacity returning to 1Q20 levels, and shale production growth all occurring by 4Q21.

Net, we expect the winter Covid wave to delay, but not derail, the oil market’s rebalancing, with normalized OECD stocks, OPEC+ spare capacity returning to 1Q20 levels and finally shale production growth all occurring by 4Q21. Our 2022 balances point

For the exclusive use of [email protected] to a balanced oil market, even after now assuming a near-full return of Iranian production. As a result, we expect Brent prices to resume their rally in 1Q21, when we forecast the Brent price averaging $47/bbl, with the winter speed bump simply delaying the return to $65/bbl by year-end 2021.

For petroleum products, our constructive demand forecasts, along with a surprisingly quick shuttering of refining capacity, leave us bullish on 2022 margins, even though the next few months will likely prove challenging. We are most constructive on distillates that are most levered to the vaccine roll-out, given their positive impact on jet demand. With oil demand back to late 2019 levels by year-end 2021 on our forecasts, we expect 7f100ca895df11e0bb4300215ace2648 2022 demand to only be 2 mb/d below our pre-Covid19 expectations.

For natural gas, we believe US markets are transitioning into a significantly tighter 2021 balance driven by low associated gas production growth given the collapse in US oil production capex. Despite a very warm start to winter, which has weighed on heating-related gas demand, we believe this has not been near enough to rectify this forward tightness. This is because it’s been accompanied by a sharp sell-off in the US gas curve, which we believe supports implied forward coal-to-gas (C2G) substitution by

20 November 2020 42 Goldman Sachs GOAL: Global Opportunity Asset Locator

more than enough to completely offset the reduction in heating demand this month. Hence, we maintain our constructive NYMEX natural gas price view with a $3.23/mmBtu forecast for 2021, 14% above current forwards.

Precious Metals We believe global reflation at the zero lower bound will drive precious higher. This year, the focus in precious markets has been on fiscal and monetary stimulus, and participants have largely ignored the inflation numbers (which were heavily impacted by the pandemic). Next year, as the economy reopens, we expect the focus to shift to whether policy stimulus and aggregated savings will lead to real inflation. Our rates team notes that under our economists’ inflation forecasts and our oil view, near-term real rates are expected to average -2.1% over the next five years. Currently, 5-year tips are only -1.2%, which suggests material room to fall. There will likely be less downside pressure on 10-year real rates, but we believe that the gold and silver markets will focus on shorter maturity rates. The reason for this is that gold is currently viewed primarily as a hedge against currency debasement, rather than equity market risk. The bulk of gold purchases this year were made, in our view, because investors were concerned about the real purchasing power of the dollar vs. losses in their equity portfolios. Nearer-term real rates were also more important post the GFC, when gold was better correlated with 2- and 5-year real rates than 10-year rates. In late-2011, while longer-term real rates continued to move higher, gold did not. Instead, it was correlated with the dollar and front-end rates. For silver, we see an additional tailwind in the form of a strong rebound in industrial demand, spearheaded by a boost to global solar investment.

Base Metals We expect a broad tightening trend in industrial metals fundamentals through 2021, which should generate a positive bias to price dynamics. First and foremost, we believe this will be supported by a firm recovery in Western demand conditions, supported

For the exclusive use of [email protected] by a combination of vaccine deployment from early in the year, and continued dovish policy setting. Evidence of this has already started to emerge in the US, and particularly for aluminium-related use in autos and construction. Moreover, there is limited evidence so far that the second wave of lockdowns in Europe is denting the positive momentum in manufacturing activity. Second, there still remains strong positive momentum in China’s demand conditions, and although more policy restraint is likely ahead, only a modest sequential deceleration is anticipated by our economists. We also believe that any stimulus-restraining moves by Beijing will be tied to evidence of a sustained Western recovery, which suggests any policy adjustments will be weighted towards at least 2Q20 with an actual activity impact unlikely until well into the second half of the 7f100ca895df11e0bb4300215ace2648 year. Copper has the most bullish prospects on a near-term basis, we believe, and higher prices will need to eventuate across the complex, to prevent scarcity conditions developing.

Agriculture Agricultural markets have posted a remarkable turnaround this year, following adverse

20 November 2020 43 Goldman Sachs GOAL: Global Opportunity Asset Locator

weather and a record import pull from China in recent months. While benign weather conditions and trade wars have weighed on prices in recent years, we believe this year’s reversal reflects the beginning of a multi-year structural repricing higher for crops. First, weather: recent years have posted low weather variability, as observed in the 1960s, and a reversion to long-run weather swings would add to price volatility and upside, with La Nina already a threat to South American production. Second, China is starting a multi-year import surge. The US-China trade war led to large destocking of Chinese corn and soybean inventories, now requiring a multi-year restocking cycle (this fits within its next five-year plan targets and should occur alongside the expansion of the Chinese hog herd). Third, we expect a return of a US-led biofuel demand pull in coming years, this time led by renewable diesel, which our agribusiness analysts estimate could represent an additional 1.5 bn bu of soybean use.

Exhibit 89: Individual commodity return forecasts GS Forecast Return Commodity Dollar Weight* Spot Roll Total GSCI BCOM 3m 6m 12m 3m 6m 12m 3m 6m 12m WTI 20.8% 5.1% 8.3 17.9 45.5 -2.4 -3.3 -1.7 5.7 14.1 43.3 Brent 14.1% 4.3% 7.3 16.4 43.8 -2.3 -2.6 -0.5 4.9 13.5 43.3 Gasoline 3.5% 1.4% 9.2 28.8 41.7 -12.0 -13.9 -5.2 -3.8 11.0 34.6 Heating Oil 3.1% 1.2% 7.8 18.7 47.4 -2.8 -4.2 -4.2 4.9 13.8 41.5 Natural Gas 3.7% 10.0% 4.7 22.2 13.5 0.0 -4.5 -12.7 4.8 16.8 -0.7 Aluminum 4.5% 4.5% 2.7 5.2 7.8 -0.5 -1.3 -3.0 2.2 3.9 4.8 Copper 5.8% 7.6% -1.5 2.0 5.6 0.0 0.0 0.3 -1.5 2.2 6.1 Nickel 1.1% 3.0% 3.9 0.8 0.8 -0.4 -0.7 -1.5 3.6 0.1 -0.5 Zinc 1.3% 3.7% -4.7 -7.5 -10.3 -0.2 -0.5 -1.0 -4.8 -7.8 -10.9 Gold 6.7% 15.6% 21.4 21.4 21.4 -0.6 -1.1 -2.1 20.8 20.2 19.1 Silver 0.8% 4.9% 20.4 20.4 20.4 -0.3 -0.6 -1.1 20.1 19.8 19.3 Wheat 4.0% 3.2% -1.6 -3.3 -9.1 -0.3 -0.6 -1.5 -1.9 -3.8 -10.2 Corn 6.3% 6.2% 2.5 6.1 2.5 -0.6 -1.4 -1.4 2.0 4.7 1.3 Soybeans 4.7% 6.7% 2.3 1.9 -0.3 -0.4 1.0 1.3 1.9 3.0 1.3 Cotton 1.4% 1.5% 2.0 3.4 4.8 -0.9 -1.7 0.0 1.2 1.7 5.0 Sugar 2.2% 3.2% -9.5 -12.7 -9.5 0.0 2.2 2.9 -9.5 -10.7 -6.6 Coffee 0.9% 2.5% -5.7 1.1 13.7 -1.0 -2.0 -3.9 -6.5 -0.9 9.4 Cocoa 0.4% 0.0% -3.5 -1.4 2.7 -0.2 -0.1 0.0 -3.6 -1.4 2.9 Live Cattle 4.4% 3.4% 0.0 2.7 11.6 -2.7 -0.1 -1.3 -2.6 2.7 10.4 Lean Hogs 2.2% 1.6% 1.9 25.4 9.8 -5.4 -12.1 0.8 -3.5 10.4 10.9 * dollar weights as of Nov 17, 2020

For the exclusive use of [email protected]

Source: Goldman Sachs Global Investment Research

For details see: 2021 Commodity Outlook: REVing up a structural bull market, November 18, 2020

Contributors: Jeffery Currie, Damien Courvalin, Mikhail Sprogis, Callum Bruce, Daniel Sharp 7f100ca895df11e0bb4300215ace2648

20 November 2020 44 Goldman Sachs GOAL: Global Opportunity Asset Locator FX: Dollar downtrend

After a long period of US economic and asset market outperformance, the Dollar appears overvalued - about 10% on standard metrics - and many investors are overweight US assets. The combination of high valuations and negative real rates skews the Dollar outlook to the downside, in our view. We expect the broad Dollar to decline 6% over the next 12m, and 15% cumulatively from its 2020 peak to the end of 2024. We think commodity currencies like AUD and CAD will be key beneficiaries of the global recovery. EM FX broadly should also benefit, but our favorite longs vs USD - MXN, ZAR, and INR - offer a combination of value, real carry, and current account dynamics that provide better risk/reward.

USD: Stronger Growth, Weaker Dollar Based on the Fed’s real trade-weighted index (TWI), the US Dollar appreciated 27% from July 2014 to April 2020. In terms of length and magnitude the gains were similar to past periods of trend appreciation and depreciation in the broad Dollar (Exhibit 90). On our GSDEER model—which is based on price levels, productivity differentials, and terms of trade—the Dollar was about 20% overvalued at the highs in March and April of this year, and is about 10% overvalued today.

Exhibit 90: Substantial Appreciation Trend since 2014

Index: Jan. 2006 = 100 Real FRB Broad Trade-Weighted Dollar Index Index: Jan. 2006 = 100 140 140

130 130 Change: -29.8% Months: 45

120 120 Change: 44.7% Change: -25.5% Months: 54 Change: 26.4% Months: 74 110 Months: 63 110 Change: 27.4%

For the exclusive use of [email protected] Months: 69 100 100

90 90

80 80 73 75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09 11 13 15 17 19 21

Source: Haver Analytics, Goldman Sachs Global Investment Research

The Dollar’s appreciation since 2014 has been accompanied by higher real money

positioning in US assets. Investor positioning is difficult to measure, but the range of 7f100ca895df11e0bb4300215ace2648 indicators we monitor suggests that Dollar assets make up a larger share of many investor portfolios. Much of this was driven by an elevated carry-to-vol in most crosses for several years when the Fed was hiking and other G10 central banks were still adding more accommodation, which has now changed dramatically.

Over the coming year we are optimistic about the US economy but bearish the Dollar. This outcome would be an unusual pattern for many currencies, but is fairly common for

20 November 2020 45 Goldman Sachs GOAL: Global Opportunity Asset Locator

the greenback and certain other “safe havens”. The value of the broad Dollar is negatively correlated with market proxies of real economic activity—e.g. equity and commodity prices—and this correlation has strengthened over time (Exhibit 91). These correlations are probably related to the unique international role of the Dollar. For example, when the global economy improves, investor demand for US Treasuries tends to fall, and if (unhedged) investors allocate into assets denominated in other currencies the value of the Dollar may also decline.

Exhibit 91: Dollar TWI Negatively Correlated with Market Proxies of Growth

Correlation Correlation with Monthly Percent Change in Real Trade-weighted US Dollar Correlation 0.0 0.0

-0.1 -0.1

-0.2 -0.2

-0.3 -0.3

-0.4 -0.4

-0.5 -0.5

-0.6 -0.6 S&P 500 S&P 500 Materials Index

-0.7 -0.7 1990s 2000s 2010s

Source: Bloomberg, Goldman Sachs Global Investment Research

Through these types of channels, we think that our forecast for a robust global economic recovery and an on-hold Fed next year will translate into broad Dollar depreciation—led by currencies that will benefit most from rising commodity prices, greater investor risk appetite, and higher trade and industrial activity. There are both upside and downside risks to our forecast of orderly Dollar depreciation. Most

For the exclusive use of [email protected] importantly, our market calls are based on a view that global GDP will expand rapidly over the next year as vaccines bring major economies close to herd immunity.

However, if COVID outbreaks cause major regions to fall back into recession, safe-haven assets such as the Dollar would likely appreciate. At the same time, there are downside risks to the Dollar relative to our projections. For instance, we could envision much more hedging of US assets by non-US investors given near-zero vol-adjusted carry. Overall we see the risks around our baseline forecasts for the broad Dollar as balanced.

G10: Rotation anticipation 7f100ca895df11e0bb4300215ace2648 Near-term Euro underperformance. We expect that a stronger global economy will ultimately propel EUR/USD to 1.25 over the next 12 months, but it may be a bumpy ride, and we expect the EUR TWI to be about flat over the coming year. With Europe’s exposure to global trade and demand from China, the Euro stands to benefit from a resurgent global economy, just as the initial reopening back in Q2 2020 was a key factor behind the Euro’s rise out of the doldrums this year (Exhibit 92). In the near term, we expect the EUR to underperform this beta as the economy is hindered by the surge in

20 November 2020 46 Goldman Sachs GOAL: Global Opportunity Asset Locator

COVID cases and associated mitigation measures that seem very likely to push growth negative over the next few months.

But, taking a wider view, we think the Euro is uniquely positioned to benefit from the turn in the Dollar trend. Following years of underperformance and sovereign credit concerns, institutional international investors have reduced their allocations to Europe across a range of measures we follow. The COVID crisis has reset the global playing field, however, and the Dollar no longer enjoys such a clear total return advantage, which should push these investors to revisit their allocations.

Exhibit 92: Euro Boosted by Global Growth, Monetary Policy

% % Factor Decomposition of EUR/USD Performance 10 10

8 8

6 6

4 4

2 2

0 0

-2 -2 Policy -4 Global growth -4 Europe risk -6 US growth -6 Recovery fund Residual -8 -8 Oil price proposal Total bottoms -10 -10 11-Feb 10-Mar 07-Apr 05-May 02-Jun 30-Jun 28-Jul 25-Aug 22-Sep 20-Oct 17-Nov Note: Policy factor includes monetary policy, funding and liquidity factors. Global growth includes China and oil factors.

Source: Goldman Sachs, Goldman Sachs Global Investment Research

Turning the page on Brexit. It appears the UK is getting ready to turn the page on the Brexit process and begin to explore life outside of the EU. We think that clarity is For the exclusive use of [email protected] enough to push for some near-term currency appreciation; we continue to believe that EUR/GBP can trade down to 0.87 on a clear “deal” outcome, mostly because it will eliminate what has been at times a substantial negative tail outcome that has likely deterred investment from abroad. Two other idiosyncratic factors add to the near-term bullish case:

First, we expect that negative interest rates can be slowly priced out of the near-term BoE rate path as the recovery takes hold. Second, the UK economy is especially exposed to sectors that have been throttled back by COVID restrictions, and the UK is

well-positioned for relatively quick vaccine deployment, so its economy stands to 7f100ca895df11e0bb4300215ace2648 “uncoil” more than others when high-contact sectors can return to normal life. Beyond that, we do not think Sterling looks particularly cheap, so do not expect sustained trend appreciation.

Pick your beta. Commonwealth currencies (AUD, NZD, CAD) and European satellites (NOK, SEK) tend to perform well when the global growth outlook improves due to their relatively high exposures to global trade. Thus, these currencies should see positive

20 November 2020 47 Goldman Sachs GOAL: Global Opportunity Asset Locator

returns over the next 12 months as the global economy reopens and central banks across the globe maintain accommodative policy.

But certain characteristics will likely drive some differentiation in performance across these currencies. For instance, the Swedish Krona should be the biggest beneficiary of the global cyclical recovery; the currency has exhibited a relatively strong historical correlation with swings in production activity. Meanwhile, the Australian Dollar and the Canadian Dollar should see the best returns in a commodity price rally (Exhibit 96).

Exhibit 93: CAD and AUD Geared to Commodity Prices

T-stat Historical FX Sensitivity to Commodity Prices T-stat 25 (Top 5 Currencies) 25

Brent Prices Copper Prices 20 20

15 15

10 10

5 5

0 0 CLP SEK RUB CAD AUD COP NOK SGD NOK MYR Note: Sensitivities are estimated using 3-day changes since 2015. We include controls for changes in broad risk (S&P 500) and the US 10- year yield. All vs USD.

Source: Bloomberg, Goldman Sachs Global Investment Research

EM: From resilience to outperformance NJA offers attractive risk-reward after the US election. With a Biden win in the US

For the exclusive use of [email protected] presidential election, risk-reward for the low-yielding currencies of North Asia appears attractive heading into 2021. In our base case of a strong recovery in global growth and global trade, NJA low-yielders are very likely to benefit (as they have done over the past two decades). Relative to their EM peers, North Asian currencies feature both (i) limited exposure to a dampening of expectations around US fiscal spending, and (ii) substantial exposure to expectations of firmer Chinese growth that could result from an easing of US-China tensions as clarity emerges on US foreign policy (Exhibit 94).

On the other hand, should the global public health outlook impact global growth more

negatively than expected, the past year has provided ample evidence that North Asia’s 7f100ca895df11e0bb4300215ace2648 relative combination of (i) relatively sound COVID management, (ii) healthy external balances, (iii) exposure to global industrial demand, more than domestic services (which typically require more face-to-face interaction), and (iv) limited downside risk from lower oil prices, has been a recipe for resilience.

20 November 2020 48 Goldman Sachs GOAL: Global Opportunity Asset Locator

Exhibit 94: NJA offers attractive risk-reward after the US election CEEMEA average excludes TRY

% % 5 5

0 0

-5 -5

-10 -10

-15 -15 More room to run -20 -20

-25 -25

% Undervalued (weighted avg. of GSDEER and GSFEER metrics) -30 -30 % Weaker than strongest 2020 level -35 -35

-40 -40 BRL COP LatAm avg. CLP PEN CEEMEA avg. MXN EM Asia avg.

Note: CEEMEA average excludes TRY.

Source: Thomson Reuters, Goldman Sachs Global Investment Research

Still Room for RMB to Appreciate, at a Slower Pace. Shifting US policy priorities and China’s outperformance on virus control and growth have led the USD/CNY exchange rate to trend steadily lower. From here, we believe the trajectory of CNY will depend on both the evolution of macro fundamentals and also on the stance of policy—and both of those are likely to continue to push in the direction of a stronger Renminbi, even if at a slower pace. China’s economic recovery remains very much “first among equals” with GDP already above pre-pandemic levels and expected to expand strongly in 2021.

From a currency standpoint, what is even more pertinent is that this growth recovery has come alongside a substantial improvement in China’s external balance, and uniquely among most major economies, an increase in short- and long-term rates back to 2.5% to 3% levels (Exhibit 95). These attractive yields should further catalyze portfolio inflows

For the exclusive use of [email protected] into Chinese government bonds (now part of major international bond indices), pushing the currency to appreciate further.

Exhibit 95: On a tactical basis, risk-reward looks better for the CNY Exhibit 96: LatAm FX features the most upside in a “Good State of and North Asia the World”

Index (Jan-2011=100) USD Bn 6% …a 10% increase in the S&P index 135 350 …a 50% increase in probability of vaccine distribution by 2021Q1 (in the US) 5% 130 300 4% 125 250 120 3%

200 7f100ca895df11e0bb4300215ace2648 115 2% more upside 150 110 1% 100 105 0% CNY vs CFETS basket (constant 2020 weights) 100 50 China trade balance in goods (6-month sum, SA, rhs) -1% MXN COP LatAm avg. BRL CLP CEEMEA PEN EM Asia 95 0 avg. avg. 11 12 13 14 15 16 17 18 19 20 21

Source: Haver Analytics, Goldman Sachs, Goldman Sachs Global Investment Research Source: Thomson Reuters, Goldman Sachs Global Investment Research

20 November 2020 49 Goldman Sachs GOAL: Global Opportunity Asset Locator

LatAm presents the deepest value and highest beta. Following a significant selloff in 2020, LatAm currencies scan as both deeply undervalued and particularly well-placed to benefit from positive news on vaccine approval, stronger growth expectations and stronger risk sentiment heading into 2021 (Exhibit 96). The Brazilian Real is the region’s leading case in point: during one of the most severe coronavirus pandemics in EM, the BRL featured a peak-to-trough selloff of more than 40% versus the Dollar in 2020H1, and remains the most deeply-undervalued major EM currency on our metrics. At the same time, BRL’s sensitivity to positive risk sentiment and, in particular, to positive vaccine news is evident not just in our empirical work, but in the stand-out performance of the lightly-positioned Real through the US election and subsequent vaccine headlines.

The case for the Mexican peso is very different than others in the region. After strong performance, which has been bolstered by more conservative fiscal and monetary policy, MXN likely doesn’t have as much “room to run” as most LatAm currencies; however, Peso longs are supported by an attractive combination of (i) high leverage to a cyclical risk upswing, (ii) the region’s highest carry (4% annualized), (iii) significant monetary policy room and (iv) relatively resilient external balances. In addition, an easing in uncertainties around regional policy proposals under a Biden administration, while well-flagged, could continue to provide support for the Peso.

Idiosyncratic risks in CEE offer mixed opportunities. Recent TCMB personnel changes and associated signaling have increased the likelihood of a significant, near-term increase in policy rates that, if realized, would imply significant downside risks to our USD/TRY forecasts. Even after a one-off rate hike, however, a credible commitment to pivot away from prioritizing growth, and towards addressing macroeconomic balances, would be required to a return to higher USD/TRY.

Compared to TRY, we are far more bullish on RUB. In the run-up to the US election, the Ruble had priced a significant amount of political risk premium, even compared to historical episodes of currency volatility. Given that the immediate focus of a new US administration may be on domestic issues in the midst of a pandemic, a For the exclusive use of [email protected] smaller-than-expected rise in tensions around Russia in the aftermath of the election could be a meaningful tactical tailwind for the Ruble.

Elsewhere, for the next 3 to 6 months, our CE-3 forecasts strike a cautious tone, reflecting the possibility that renewed virus outbreaks and lockdowns in Q4 and Q1 can weigh on the growth, both domestically and in the Euro area. By end-2021, however, our forecasts are more optimistic, reflecting both (i) the potential for an easing of activity restrictions due to higher spring temperatures, and (ii) the potential for CEE to benefit from a coordinated roll-out of vaccine distribution at the EU level, which would likely put these countries on an accelerated timeline compared to many EMs. 7f100ca895df11e0bb4300215ace2648

For details see:

2021 Global FX Outlook: Dollar Downtrend, November 13, 2020

EM Market Outlook 2021: From Resilience to Outperformance, November 17, 2020

Contributors: Zach Pandl, Kamakshya Trivedi, Mike Cahill, Ian Tomb

20 November 2020 50 Goldman Sachs GOAL: Global Opportunity Asset Locator Calendar: Key events in 2021

Date Region Event End 2020 21 -22 Nov Global 2020 G20 Riyadh Summit 30 Nov - 1 Dec Global OPEC Meeting Late Nov - Dec Global BNT162 & mRNA-1273 vaccine: Potential EUA filing (Pfizer & Moderna) Late Nov - Dec Global MK-4482 anti-viral: Initial Ph2 data (Merck & Co.) Late Nov - Dec Global REGN-COV2 antibody: Potential EUA granted from FDA (Regeneron) Late Nov - Dec Global AZD1222 vaccine: Ph3 ex-US data (Astrazeneca) Dec Global Recombinant Vaccine: Ph 1/2 (Pfizer) + Ph 3 study (Eli Lilly/Moderna) Dec Global BNT162 vaccine: Potential FDA Adcom panel meeting (Pfizer) 8 Dec US "Safe Harbor" - deadline for states with contested elections to file results 8 - 10 Dec US FDA VRBPAC meeting on vaccine approval 10 Dec Eurozone ECB Meeting 10 - 11 Dec EU EU Council meeting 14 Dec US Electors meet in State Capital to vote 15 - 16 Dec US FOMC Meeting & Conference 17 - 18 Dec Japan BOJ Monetary Policy Meeting 23 Dec US States send electoral votes to Congress 31 Dec UK/EU End of UK’s post-Brexit transition period Dec 2020 - early 2021 Global LY-CoV555 antibody: Ph3 data from NIAID studies (Ely Lilly) Dec 2020 - early 2021 Global BNT162 & mRNA-1273 vaccine: Potential EUA from FDA (Pfizer & Moderna) Q1 2021 Jan - Mar Global FY20 Reporting season Jan Portugal Presidential Election 3 Jan US New Congress sits at noon 5 Jan US Georgia U.S. Senate runoff elections 6 Jan US Congress meets to count electoral votes and declare winner 18 - 19 Jan HK/Asia Asia Financial Forum 20 Jan US Inauguration Day 20 - 21 Jan Japan BOJ Monetary Policy Meeting (with Outlook Report) 21 Jan Eurozone ECB Meeting 26 - 27 Jan US FOMC Meeting 22 - 25 Feb HK/Asia Asia Trade Summit 2021 Mar China National People’s Congress and CPPCC 11 Mar Eurozone ECB Meeting 16- 17 Mar US FOMC Meeting & Conference 17 Mar Netherlands General Election 18 - 19 Mar Japan BOJ Monetary Policy Meeting 25 - 26 Mar EU EU Council meeting Q2 2021 22 Apr Eurozone ECB Meeting 26 - 27 Apr Japan BOJ Monetary Policy Meeting (with Outlook Report) 27 - 28 Apr US FOMC Meeting Apr - May India Regional Elections 2 - 5 May Asia 54th Asia Development Bank Annual Meetings 6 May UK Scottish Parliamentary Election 18 - 21 May Global World Economic Forum Annual Meeting June - TBD Global Sintra Forum on Central Banking 10 Jun Eurozone ECB Meeting 15 - 16 Jun US FOMC Meeting & Conference 17 - 18 Jun Japan BOJ Monetary Policy Meeting 24 - 25 Jun EU EU Council meeting Q3 2021 For the exclusive use of [email protected] 15 - 16 Jul Japan BOJ Monetary Policy Meeting (with Outlook Report) 22 Jul Eurozone ECB Meeting 27 - 28 Jul USA FOMC Meeting Aug - TBD Global Jackson Hole FRB Symposium Aug-Oct Germany Federal Election 5 Sep Hong Kong Legislative Election 9 Sep Eurozone ECB Meeting 19 Sep Russia Legislative Election 13 Sep Norway Parliamentary Election 21 - 22 Sep USA FOMC Meeting & Conference 21 - 22 Sep Japan BOJ Monetary Policy Meeting Q4 2021 14 - 15 Oct EU EU Council meeting 22 Oct Japan General Election 27 - 28 Oct Japan BOJ Monetary Policy Meeting (with Outlook Report) 28 Oct Eurozone ECB Meeting 1 - 2 Nov Global 26th UN Climate Change Conference of the Parties (COP26) in Glasgow

2 - 3 Nov USA FOMC Meeting 7f100ca895df11e0bb4300215ace2648 16 Dec Eurozone ECB Meeting 14 - 15 Dec US FOMC Meeting & Conference 16 - 17 Dec Japan BOJ Monetary Policy Meeting To schedule TBD Global 2021 G20 Rome Summit TBD Global 2021 G7 Summit (UK to host) TBD Global OPEC TBD Global NATO leader’s Summit

Source: Goldman Sachs Global Investment Research

20 November 2020 51 Goldman Sachs GOAL: Global Opportunity Asset Locator Asset class forecast returns and performance

Exhibit 97: Goldman Sachs’ 3-, 6- and 12-month return forecasts by asset class Benchmark 3-month Total Return 6-month Total Return 12-month Total Return Asset Class Weight Local currency In USD Local currency In USD Local currency In USD Equities 35 4.3 4.0 11.5 12.3 16.8 19.4 S&P 500 40 3.7 3.7 15.3 15.3 21.7 21.7 STOXX Europe 600 30 5.3 3.7 9.9 11.4 14.0 20.4 MSCI Asia Pac ex Japan 20 5.0 5.4 9.4 10.1 14.2 15.3 TOPIX 10 1.9 2.8 5.4 7.3 10.8 15.2 10 yr. Government Bonds 45 0.9 0.8 0.2 1.2 -1.4 1.4 US 40 1.5 1.5 0.4 0.4 -2.0 -2.0 Germany 30 0.4 -0.8 -0.3 1.1 -1.6 3.9 Japan 30 0.6 1.4 0.3 2.2 -0.4 3.5 Credit 10 2.0 1.6 2.6 3.0 3.0 4.8 Bloomberg Barclays US IG 40 2.1 2.1 2.2 2.2 1.4 1.4 Bloomberg Barclays US HY 20 2.0 2.0 3.1 3.1 4.9 4.9 iBoxx EUR IG 20 0.9 -0.3 1.2 2.6 1.5 7.2 BAML EUR HY 10 1.6 0.4 3.2 4.6 5.0 10.9 JP Morgan EMBI Div. 10 3.8 3.8 5.2 5.2 6.9 6.9 Commodities (S&P GSCI Enhanced) 5 3.4 3.4 9.4 9.4 26.8 26.8 Cash 5 0.0 -0.6 -0.1 0.6 -0.1 2.7 US 50 0.1 0.1 0.2 0.2 0.3 0.3 Euro area 50 -0.1 -1.3 -0.3 1.1 -0.5 5.0 FX 3m target Return 6m target Return 12m target Return EUR/$ 1.17 -1.2 1.20 1.4 1.25 5.6 $/YEN 103 -0.9 102 -1.8 100 -3.7

Source: Datastream, Bloomberg, Goldman Sachs Global Investment Research

Exhibit 98: Performance of asset classes YTD

120 125 Government bonds US 10 year Gov. bonds German 10 year Gov. bonds 110 120 Japan 10 year Gov. bonds

100 115

90 110

80 Equities 105 S&P 500

For the exclusive use of [email protected] Topix 70 MXAPJ 100 Stoxx Europe 600

60 95 Jan-20 Mar-20 May-20 Jul-20 Sep-20 Nov-20 Jan-20 Mar-20 May-20 Jul-20 Sep-20 Nov-20

115 110 Commodities 110 100 105 90 100

95 80

90 Credit US IG Credit 70 7f100ca895df11e0bb4300215ace2648 85 European IG Credit US HY Credit EUR HY Credit 60 80 EM USD credit (EMBI)

75 50 Jan-20 Mar-20 May-20 Jul-20 Sep-20 Nov-20 Jan-20 Mar-20 May-20 Jul-20 Sep-20 Nov-20

Source: Datastream, Goldman Sachs Global Investment Research

20 November 2020 52 Goldman Sachs GOAL: Global Opportunity Asset Locator Key macro forecasts

Exhibit 99: GS forecasts across asset classes

Return in % over last Current Forecasts Up/ (downside) in % 12 m 3 m 1 m YTD Level 3m 6m 12m Unit 3m 6m 12m S&P 500 ($) 17.0 6.6 4.7 12.7 3582 3700 4100 4300 Index 3.3 14.5 20.0 Stoxx Europe 600 (€) -1.9 5.2 5.8 -4.5 388 405 420 430 Index 4.5 8.4 10.9 MSCI Asia-Pacific Ex-Japan ($) 19.7 9.8 6.5 14.7 620 650 675 700 Index 4.8 8.9 12.9 Topix (¥) 4.2 7.9 5.4 2.6 1726 1750 1800 1875 Index 1.4 4.3 8.6 10 Year Government Bond Yields US 12.0 -1.4 -0.7 13.1 0.86 0.80 0.93 1.23 % -5 bps 8 bps 38 bps Germany 2.5 0.8 -0.6 4.0 -0.57 -0.57 -0.52 -0.42 % 0 bps 5 bps 15 bps Japan -0.7 0.2 0.1 0.0 0.02 0.00 0.03 0.10 % -2 bps 1 bps 8 bps UK 4.6 -0.8 -1.3 5.4 0.33 0.20 0.25 0.45 % -13 bps -7 bps 13 bps Credit Bloomberg Barclays US IG 9.6 1.5 1.5 8.8 110 106 102 100 Bps -4 bps -8 bps -10 bps Bloomberg Barclays US HY 6.8 3.5 2.2 4.4 417 384 359 342 Bps -33 bps -58 bps -75 bps iBoxx EUR IG 2.4 1.7 0.7 2.4 107 102 98 96 Bps -4 bps -8 bps -10 bps BAML EUR HY 2.7 3.4 2.4 1.0 391 374 351 332 Bps -17 bps -40 bps -59 bps JP Morgan EMBI Div. 6.3 1.4 2.0 3.8 382 360 346 325 Bps -22 bps -36 bps -57 bps Commodities WTI -24.5 -3.2 2.2 -32.0 42 45 49 60.5 $/bbl 8.3 17.9 45.6 Brent -27.4 -2.5 3.7 -33.2 44 47 51 63 $/bbl 6.2 15.2 42.3 Copper 20.8 5.6 4.7 15.1 7076 7000 7250 7500 $/mt -1.1 2.5 6.0 Gold 26.2 -5.3 -2.5 22.3 1859 2300 2300 2300 $/troy oz 23.7 23.7 23.7 FX EUR/USD 6.9 -0.5 0.5 5.5 1.18 1.17 1.20 1.25 -1.2 1.4 5.6 USD/JPY -4.2 -1.7 -1.5 -4.4 104 103 102 100 -0.9 -1.8 -3.7 GBP/USD 2.3 0.3 1.7 -0.2 1.32 1.34 1.38 1.44 1.3 4.4 8.9 USD/BRL 26.1 -3.3 -5.1 32.1 5.31 5.2 5.1 5.1 -2.1 -4.0 -4.0 USD/RUB 19.5 4.5 -1.5 22.9 76.34 71 70 68 -7.0 -8.3 -10.9 USD/INR 3.6 -0.7 1.2 4.1 74.27 72 71 70 -3.1 -4.4 -5.7 USD/CNY -6.2 -4.7 -1.6 -5.5 6.59 6.50 6.40 6.30 -1.3 -2.8 -4.3

Source: Datastream, Bloomberg, Goldman Sachs Global Investment Research

Exhibit 100: DM GDP growth vs. GS CAI and GDP forecasts Exhibit 101: EM GDP growth vs. GS CAI and GDP forecasts

30 30 DM CAI EM CAI DM GDP (YoY) 25 EM GDP (YoY) 20 DM GDP (Forecast) 20 EM GDP (Forecast)

10 15 10 0 5

0 -10 -5

-20 -10

For the exclusive use of [email protected] -15 -30 -20

-40 -70 -25 12 13 14 15 16 17 18 19 20 21 22 12 13 14 15 16 17 18 19 20 21 22

Source: Goldman Sachs Global Investment Research Source: Goldman Sachs Global Investment Research

Exhibit 102: GS real GDP growth forecasts vs. consensus 2019 2020E 2021E 2022E % yoy Realized GS Consensus* GS Consensus* GS Consensus* USA 2.2 -3.5 -3.6 5.3 3.8 3.8 2.9 Japan 0.7 -5.3 -5.4 3.4 2.5 2.0 1.7

Euro area 1.3 -7.2 -7.3 5.3 4.8 4.3 3.4 7f100ca895df11e0bb4300215ace2648 UK 1.3 -11.2 -11.0 5.3 5.2 7.3 4.0 Advanced Economies 1.6 -5.5 -5.3 5.0 4.0 4.0 2.9 Emerging Markets 4.1 -2.7 -0.8 6.8 4.9 5.0 5.0 World 2.9 -3.9 -3.9 6.0 5.2 4.6 3.6 * Bloomberg Consensus

Source: Bloomberg, Goldman Sachs Global Investment Research

20 November 2020 53 Goldman Sachs GOAL: Global Opportunity Asset Locator Disclosure Appendix

Reg AC

We, Christian Mueller-Glissmann, CFA, Alessio Rizzi, Cecilia Mariotti, Andrea Ferrario, Peter Oppenheimer, David J. Kostin, Kathy Matsui, Timothy Moe, CFA, Jeffrey Currie, Lotfi Karoui, Zach Pandl, Kamakshya Trivedi, Praveen Korapaty and Caesar Maasry, hereby certify that all of the views expressed in this report accurately reflect our personal views, which have not been influenced by considerations of the firm’s business or client relationships. Unless otherwise stated, the individuals listed on the cover page of this report are analysts in Goldman Sachs’ Global Investment Research division. Disclosures Equity Basket Disclosure The ability to trade the basket(s) discussed in this research will depend upon market conditions, including liquidity and borrow constraints at the time of trade. MSCI Disclosure All MSCI data used in this report is the exclusive property of MSCI, Inc. (MSCI). Without prior written permission of MSCI, this information and any other MSCI intellectual property may not be reproduced or redisseminated in any form and may not be used to create any financial instruments or products or any indices. This information is provided on an “as is” basis, and the user of this information assumes the entire risk of any use made of this information. Neither MSCI, any of its affiliates nor any third party involved in, or related to, computing or compiling the data makes any express or implied warranties or representations with respect to this information (or the results to be obtained by the use thereof), and MSCI, its affiliates and any such third party hereby expressly disclaim all warranties of originality, accuracy, completeness, merchantability or fitness for a particular purpose with respect to any of this information. Without limiting any of the foregoing, in no event shall MSCI, any of its affiliates or any third party involved in, or related to, computing or compiling the data have any liability for any direct, indirect, special, punitive, consequential or any other damages (including lost profits) even if notified of the possibility of such damages. MSCI and the MSCI indexes are service marks of MSCI and its affiliates. The Global Industry Classification Standard (GICS) were developed by and is the exclusive property of MSCI and Standard & Poor’s. GICS is a service mark of MSCI and S&P and has been licensed for use by The Goldman Sachs Group. Options-specific Disclosure Price target methodology: Please refer to the analyst’s previously published research for methodology and risks associated with equity price targets. Pricing Disclosure: Option prices and volatility levels in this note are indicative only, and are based on our estimates of recent mid-market levels (unless otherwise noted). All prices and levels exclude transaction costs unless otherwise stated. General Options Risks: The risks below and any other options risks mentioned in this research report pertain both to specific derivative trade recommendations mentioned and to discussion of general opportunities and advantages of derivative strategies. Unless otherwise noted, options strategies mentioned in this report may be a combination of the strategies below and therefore carry with them the risks of those strategies. Buying Options: Investors who buy call (put) options risk loss of the entire premium paid if the underlying security finishes below (above) the strike price at expiration. Investors who buy call or put spreads also risk a maximum loss of the premium paid. The maximum gain on a long call or put spread is the difference between the strike prices, less the premium paid. Selling Options: Investors who sell calls on securities they do not own risk unlimited loss of the security price less the strike price. Investors who sell covered calls (sell calls while owning the underlying security) risk having to deliver the underlying security or pay the difference between the security price and the strike price, depending on whether the option is settled by physical delivery or cash-settled. Investors who sell puts risk loss of the strike price less the premium received for selling the put. Investors who sell put or call spreads risk a maximum loss of the difference between the strikes less the premium received, while their maximum gain is the premium received. For options settled by physical delivery, the above risks assume the options buyer or seller, buys or sells the resulting securities at the settlement price

For the exclusive use of [email protected] on expiry. Regulatory disclosures Disclosures required by United States laws and regulations See company-specific regulatory disclosures above for any of the following disclosures required as to companies referred to in this report: manager or co-manager in a pending transaction; 1% or other ownership; compensation for certain services; types of client relationships; managed/co-managed public offerings in prior periods; directorships; for equity securities, market making and/or specialist role. Goldman Sachs trades or may trade as a principal in debt securities (or in related derivatives) of issuers discussed in this report. The following are additional required disclosures: Ownership and material conflicts of interest: Goldman Sachs policy prohibits its analysts, professionals reporting to analysts and members of their households from owning securities of any company in the analyst’s area of coverage. Analyst compensation: Analysts are paid in part based on the profitability of Goldman Sachs, which includes investment banking revenues. Analyst as officer or director: Goldman Sachs policy generally prohibits its analysts, persons reporting to analysts or members of their households from serving as an officer, director or advisor of any company in the analyst’s area of coverage. Non-U.S. Analysts: Non-U.S. analysts may not be associated persons of Goldman Sachs & Co. LLC and therefore may not be subject to FINRA Rule 2241 or FINRA Rule 2242 restrictions on communications with subject company, public appearances and trading securities held by the analysts. 7f100ca895df11e0bb4300215ace2648 Additional disclosures required under the laws and regulations of jurisdictions other than the United States The following disclosures are those required by the jurisdiction indicated, except to the extent already made above pursuant to United States laws and regulations. Australia: Goldman Sachs Australia Pty Ltd and its affiliates are not authorised deposit-taking institutions (as that term is defined in the Banking Act 1959 (Cth)) in Australia and do not provide banking services, nor carry on a banking business, in Australia. This research, and any access to it, is intended only for “wholesale clients” within the meaning of the Australian Corporations Act, unless otherwise agreed by Goldman Sachs. In producing research reports, members of the Global Investment Research Division of Goldman Sachs Australia may attend site visits and other meetings hosted by the companies and other entities which are the subject of its research reports. In some instances the costs of such site visits or meetings may be met in part or in whole by the issuers concerned if Goldman Sachs Australia considers it is appropriate and reasonable in the specific circumstances relating to the site visit or meeting. To the extent that the contents of this document contains any financial product advice, it is general advice only and has been prepared by Goldman Sachs without taking into account a client’s objectives, financial situation or needs. A client should,

20 November 2020 54 Goldman Sachs GOAL: Global Opportunity Asset Locator

before acting on any such advice, consider the appropriateness of the advice having regard to the client’s own objectives, financial situation and needs. A copy of certain Goldman Sachs Australia and New Zealand disclosure of interests and a copy of Goldman Sachs’ Australian Sell-Side Research Independence Policy Statement are available at: https://www.goldmansachs.com/disclosures/australia-new-zealand/index.html. Brazil: Disclosure information in relation to CVM Instruction 598 is available at https://www.gs.com/worldwide/brazil/area/gir/index.html. Where applicable, the Brazil-registered analyst primarily responsible for the content of this research report, as defined in Article 20 of CVM Instruction 598, is the first author named at the beginning of this report, unless indicated otherwise at the end of the text. Canada: Goldman Sachs Canada Inc. is an affiliate of The Goldman Sachs Group Inc. and therefore is included in the company specific disclosures relating to Goldman Sachs (as defined above). Goldman Sachs Canada Inc. has approved of, and agreed to take responsibility for, this research report in Canada if and to the extent that Goldman Sachs Canada Inc. disseminates this research report to its clients. Hong Kong: Further information on the securities of covered companies referred to in this research may be obtained on request from Goldman Sachs (Asia) L.L.C. India: Further information on the subject company or companies referred to in this research may be obtained from Goldman Sachs (India) Securities Private Limited, Research Analyst - SEBI Registration Number INH000001493, 951-A, Rational House, Appasaheb Marathe Marg, Prabhadevi, Mumbai 400 025, India, Corporate Identity Number U74140MH2006FTC160634, Phone +91 22 6616 9000, Fax +91 22 6616 9001. Goldman Sachs may beneficially own 1% or more of the securities (as such term is defined in clause 2 (h) the Indian Securities Contracts (Regulation) Act, 1956) of the subject company or companies referred to in this research report. Japan: See below. Korea: This research, and any access to it, is intended only for “professional investors” within the meaning of the Financial Services and Capital Markets Act, unless otherwise agreed by Goldman Sachs. Further information on the subject company or companies referred to in this research may be obtained from Goldman Sachs (Asia) L.L.C., Seoul Branch. New Zealand: Goldman Sachs New Zealand Limited and its affiliates are neither “registered banks” nor “deposit takers” (as defined in the Reserve Bank of New Zealand Act 1989) in New Zealand. This research, and any access to it, is intended for “wholesale clients” (as defined in the Financial Advisers Act 2008) unless otherwise agreed by Goldman Sachs. A copy of certain Goldman Sachs Australia and New Zealand disclosure of interests is available at: https://www.goldmansachs.com/disclosures/australia-new-zealand/index.html. Russia: Research reports distributed in the Russian Federation are not advertising as defined in the Russian legislation, but are information and analysis not having product promotion as their main purpose and do not provide appraisal within the meaning of the Russian legislation on appraisal activity. Research reports do not constitute a personalized investment recommendation as defined in Russian laws and regulations, are not addressed to a specific client, and are prepared without analyzing the financial circumstances, investment profiles or risk profiles of clients. Goldman Sachs assumes no responsibility for any investment decisions that may be taken by a client or any other person based on this research report. Singapore: Goldman Sachs (Singapore) Pte. (Company Number: 198602165W), which is regulated by the Monetary Authority of Singapore, accepts legal responsibility for this research, and should be contacted with respect to any matters arising from, or in connection with, this research. Taiwan: This material is for reference only and must not be reprinted without permission. Investors should carefully consider their own investment risk. Investment results are the responsibility of the individual investor. United Kingdom: Persons who would be categorized as retail clients in the United Kingdom, as such term is defined in the rules of the Financial Conduct Authority, should read this research in conjunction with prior Goldman Sachs research on the covered companies referred to herein and should refer to the risk warnings that have been sent to them by Goldman Sachs International. A copy of these risks warnings, and a glossary of certain financial terms used in this report, are available from Goldman Sachs International on request. European Union: Disclosure information in relation to Article 6 (2) of the European Commission Delegated Regulation (EU) (2016/958) supplementing Regulation (EU) No 596/2014 of the European Parliament and of the Council with regard to regulatory technical standards for the technical arrangements for objective presentation of investment recommendations or other information recommending or suggesting an investment strategy and for disclosure of particular interests or indications of conflicts of interest is available at https://www.gs.com/disclosures/europeanpolicy.html which states the European Policy for Managing Conflicts of Interest in Connection with Investment Research. Japan: Goldman Sachs Japan Co., Ltd. is a Financial Instrument Dealer registered with the Kanto Financial Bureau under registration number Kinsho 69, and a member of Japan Securities Dealers Association, Financial Futures Association of Japan and Type II Financial Instruments Firms Association. Sales and purchase of equities are subject to commission pre-determined with clients plus consumption tax. See company-specific disclosures as to any applicable disclosures required by Japanese stock exchanges, the Japanese Securities Dealers Association or the Japanese Securities Finance Company. Global product; distributing entities The Global Investment Research Division of Goldman Sachs produces and distributes research products for clients of Goldman Sachs on a global basis. Analysts based in Goldman Sachs offices around the world produce research on industries and companies, and research on macroeconomics, currencies, commodities and portfolio strategy. This research is disseminated in Australia by Goldman Sachs Australia Pty Ltd (ABN 21 006 797 897); in Brazil by Goldman Sachs do Brasil Corretora de Títulos e Valores Mobiliários S.A.; Ombudsman Goldman Sachs Brazil: 0800 727 5764 and / or [email protected]. Available Weekdays (except holidays), from 9am to 6pm. Ouvidoria Goldman Sachs Brasil: 0800 727 5764 e/ou

For the exclusive use of [email protected] [email protected]. Horário de funcionamento: segunda-feira à sexta-feira (exceto feriados), das 9h às 18h; in Canada by either Goldman Sachs Canada Inc. or Goldman Sachs & Co. LLC; in Hong Kong by Goldman Sachs (Asia) L.L.C.; in India by Goldman Sachs (India) Securities Private Ltd.; in Japan by Goldman Sachs Japan Co., Ltd.; in the Republic of Korea by Goldman Sachs (Asia) L.L.C., Seoul Branch; in New Zealand by Goldman Sachs New Zealand Limited; in Russia by OOO Goldman Sachs; in Singapore by Goldman Sachs (Singapore) Pte. (Company Number: 198602165W); and in the United States of America by Goldman Sachs & Co. LLC. Goldman Sachs International has approved this research in connection with its distribution in the United Kingdom and European Union. European Union: Goldman Sachs International authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority, has approved this research in connection with its distribution in the European Union and United Kingdom. General disclosures This research is for our clients only. Other than disclosures relating to Goldman Sachs, this research is based on current public information that we consider reliable, but we do not represent it is accurate or complete, and it should not be relied on as such. The information, opinions, estimates and forecasts contained herein are as of the date hereof and are subject to change without prior notification. We seek to update our research as appropriate, but various regulations may prevent us from doing so. Other than certain industry reports published on a periodic basis, the large majority of reports are published at irregular intervals as appropriate in the analyst’s judgment. 7f100ca895df11e0bb4300215ace2648 Goldman Sachs conducts a global full-service, integrated investment banking, investment management, and brokerage business. We have investment banking and other business relationships with a substantial percentage of the companies covered by our Global Investment Research Division. Goldman Sachs & Co. LLC, the United States broker dealer, is a member of SIPC (https://www.sipc.org). Our salespeople, traders, and other professionals may provide oral or written market commentary or trading strategies to our clients and principal trading desks that reflect opinions that are contrary to the opinions expressed in this research. Our asset management area, principal trading desks and investing businesses may make investment decisions that are inconsistent with the recommendations or views expressed in this research. We and our affiliates, officers, directors, and employees, will from time to time have long or short positions in, act as principal in, and buy or sell, the securities or derivatives, if any, referred to in this research, unless otherwise prohibited by regulation or Goldman Sachs policy. The views attributed to third party presenters at Goldman Sachs arranged conferences, including individuals from other parts of Goldman Sachs, do not necessarily reflect those of Global Investment Research and are not an official view of Goldman Sachs.

20 November 2020 55 Goldman Sachs GOAL: Global Opportunity Asset Locator

Any third party referenced herein, including any salespeople, traders and other professionals or members of their household, may have positions in the products mentioned that are inconsistent with the views expressed by analysts named in this report. This research is focused on investment themes across markets, industries and sectors. It does not attempt to distinguish between the prospects or performance of, or provide analysis of, individual companies within any industry or sector we describe. Any trading recommendation in this research relating to an equity or credit security or securities within an industry or sector is reflective of the investment theme being discussed and is not a recommendation of any such security in isolation. This research is not an offer to sell or the solicitation of an offer to buy any security in any jurisdiction where such an offer or solicitation would be illegal. It does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual clients. Clients should consider whether any advice or recommendation in this research is suitable for their particular circumstances and, if appropriate, seek professional advice, including tax advice. The price and value of investments referred to in this research and the income from them may fluctuate. Past performance is not a guide to future performance, future returns are not guaranteed, and a loss of original capital may occur. Fluctuations in exchange rates could have adverse effects on the value or price of, or income derived from, certain investments. Certain transactions, including those involving futures, options, and other derivatives, give rise to substantial risk and are not suitable for all investors. Investors should review current options and futures disclosure documents which are available from Goldman Sachs sales representatives or at https://www.theocc.com/about/publications/character-risks.jsp and https://www.fiadocumentation.org/fia/regulatory-disclosures_1/fia-uniform-futures-and-options-on-futures-risk-disclosures-booklet-pdf-version-2018. Transaction costs may be significant in option strategies calling for multiple purchase and sales of options such as spreads. Supporting documentation will be supplied upon request. Differing Levels of Service provided by Global Investment Research: The level and types of services provided to you by the Global Investment Research division of GS may vary as compared to that provided to internal and other external clients of GS, depending on various factors including your individual preferences as to the frequency and manner of receiving communication, your risk profile and investment focus and perspective (e.g., marketwide, sector specific, long term, short term), the size and scope of your overall client relationship with GS, and legal and regulatory constraints. As an example, certain clients may request to receive notifications when research on specific securities is published, and certain clients may request that specific data underlying analysts’ fundamental analysis available on our internal client websites be delivered to them electronically through data feeds or otherwise. No change to an analyst’s fundamental research views (e.g., ratings, price targets, or material changes to earnings estimates for equity securities), will be communicated to any client prior to inclusion of such information in a research report broadly disseminated through electronic publication to our internal client websites or through other means, as necessary, to all clients who are entitled to receive such reports. All research reports are disseminated and available to all clients simultaneously through electronic publication to our internal client websites. Not all research content is redistributed to our clients or available to third-party aggregators, nor is Goldman Sachs responsible for the redistribution of our research by third party aggregators. For research, models or other data related to one or more securities, markets or asset classes (including related services) that may be available to you, please contact your GS representative or go to https://research.gs.com. Disclosure information is also available at https://www.gs.com/research/hedge.html or from Research Compliance, 200 West Street, New York, NY 10282. © 2020 Goldman Sachs. No part of this material may be (i) copied, photocopied or duplicated in any form by any means or (ii) redistributed without the prior written consent of The Goldman Sachs Group, Inc. For the exclusive use of [email protected] 7f100ca895df11e0bb4300215ace2648

20 November 2020 56